faculty upgradatjon programme in environmental economics

FACULTY UPGRADATJON PROGRAMME IN
ENVIRONMENTAL ECONOMICS
Septem
ber
iO -
Octo ber
9, 20V]
V O L U M E -II
A p p ro a c h , M ethods, a n d C ase Studies
E c o L O c rc A L E c o n o m ic s u n i t
NSTITUTE FOR SOCIAL AND ECONO M IC CHANGE
N a g a r b i i a v i P.O., B a n g a l o r e -5 6 0 072
jCoURSE MATERlAq
F A C U L T Y U PG R A D A TIO N PR O G R A M M E IN EN V IR O N M EN TA L
ECO N O M IC S
E c o l o g i c a l E c o n o m ic s U n it
I n s t i t u t e f o r S o c ia l and Ec o n o m ic C h a n g e
B a n g a l o r e - 5 6 0 072
II
Approach, Methods, and Case Studies
1.
Markandya, A; and J. Richardson (1992), “ The Value of the Environment: A status of
the Art Survey ' (Chapter II), in Earihsccin Reacting in Environmental Economics,
Earthscan PubJtcalioiis Lid., London, pp. J421 - 166.
2.
Pearce, D (1993), Economic Values and the Natural World, Earthscan Publication Ltd..
London.
Chapter 2: “What is Economic Valuation"
(pp.13-53)
Chapter 3: “Valuation and Discounting the Future”
(pp.54-62)
Chapter 4: “Valuation in Practice”
(pp.63-92)
3.
Costanza, R. et.al, (1995), “The Value of the World’s Ecosystem Services and Natural
Capital", Ecological Economics, 25, pp.3-15.
4.
May, R.M. (1996), “Conceptual Aspects of the Quantification of the Extent of Biological
Diversity” (Chapter I), Biodiversity: Measurement find Estimation, ed. D.L.
Hawksworth, The Royal Society, Chapman and Hall, London, pp.13-20.
5.
Edwards. Pamela Stedman, “A Framework for Analysing Biodiversity Loss” (Chapter
2), in The Root Causes o f Biodiversity Loss, (ed) Alexander Wood, et.al.,' Rarlli.scan
Publications, Ltd , London, pp.l 1-35.
6.
Kuik, O.J, et.al..(1997), “Instrument Choice in Theory and Practice”, (Chapter .2) in
Pollution Control in The South and North, Sage Publication. New Dellii. pp.30-60.
7.
Pears, D and E - 13. Barbier (2000), Blueprint for a Sustainable Economy'
Earthscan Publications, Ltd., London,
Chapter 4; "Measuring Sustainable Development: Economic Approaches”
(pp.84-101)
Chapter 5; "Measuring Sustainable Development; Ecological Approaches”
(pp.102-129)
8.
Kuik, O J; and H,Vergruggen,(eds) (1996) In Search o f Indicators o f Sustainuhle
Development, Kluwer Academic Publishers, Dordrecht, The Netherlands .
Chapter 1: “Indicators of Siislaiiiable Development: An Overview”,
(pp. 1-6)
Chapter 2: “Towards Sustainable Development Indicators”
(pp.7-27)
9.
Markandya, A; and M.N Murthy. (2000), Clecining-iip the Ganges: A Cosl-Benefii
Analysis o f the Canga Action Plan, Oxford University Press,,New Delhi
Chapter 5: “Measuring Non-user Benefits from Cleaning-up the Ganges”
(pp.'84-115)
.
Chapter 6 ; “Measuring User Benefits from Cleaning-up the Ganges”
(pp.l 16-143)
10.
Faux, J and G.M. Perry (1999), “Estimating Irrigation Water Value Using Hedonic Price
Analysis: A Case Study in Malheur County. Oregon”, Land Economics, 75(3), pp.440452.
11.
Murthy, M.N; and S. Kumar (2001), “Environmental and Economic Accounting, and the
Shadow Prices of Natural Resources: Some Conceptual Issues and a Case Study of
Industrial Water Pollution in India,” Working Paper Series, Institute of Economic
Growth, Delhi.
Th e Earthscan reader in
Environmental
economics
Edited by
A nil M arkandya and
Julie Richardson
g Q ia O O S S Q G ;!]
E a r t h s c a n P u b lic a t io n s L td , L o n d o n
First publislieil IV92 by
Earthscan Publications Ltd
,120 Pentonvillc R oad, London N1 9JN
Copyright © by Anil M arkandya and Julie Ricliai dsoii
All rights reserved
British L ib r a r y Cataloguing-in Publication Data
Markandya, Anil
Tlie Earthscan reader in cnvimnniciilal cconoinhs
I. Title
II. Richardson, Julie
333.7
ISBN 1-85383-106-9
Typeset by The Ca.stlericld Piess Ltd., Wellingboi ougli, Northants in 8/9 point Times.
Printed by Biddles Ltd, Guildford and Kings Lynn.
Earthscan Publications Ltd is an editorially independent subsidiary of Kogan Page Ltd and
publisltcsin association with the Intcrnnlional Insiliulc for Hnvironnicnt and Development
and the World Wide Fund for Nature (UK).
Chapter 11
Ihe value o f the environm ent:
a state o f the art survey
Anil Markandya
VALUATION M L T ilO D S
T lie approaches to the econ om ic n icasu reincnt o f environ m ental ben efits can be
broadiy cJassificd as;
(a ) th ose based on direct and in d iicct m arket inform ation, such as property
values, w age rates; expenditure on related go o d s etc.;
(b ) th ose based on stated preferen ces in the absence o f m arkets, as expressed
through question n aires or through public or charitable coiilribution s;
(c ) tliose based on d osc-rcsp on sc data linking ciivironm cntal changes to
p ollu tan ts.
Jij aU cases iJic pur/josc is to elicit individual values, as expressed in term s o f
w illingness to pay for an cnviron m eiilaj im p rovem en t, or w illingness to accept
com p en sation for an environm ental deterioration. H o w ev er, in the first tw o,
w here m arket infoi inalioii is sou gh t, or w here staled j)i cfcrcn ccs arc sought in the
ab sen ce o f markct.s, the link betw een w illingness to j)ay or accept paym ent and
the m easured value is m uch clearer llian it is in the ih iid case, w here the m ethod
relies m uch m ore on scientific and en gin eerin g data. T lic rcm atiidcr o f llii.s paper
d escribes each o f the techniques and discusses the main problem s that arise in
im p lem en tin g them .
'
M A RK ET UASED M ETHODS: HEDONIC PRICE APPROACHES
T h e h ed o n ic price approach look s for a m arket in which g o o d s or factors o f'
. production (esp ecially labour scrv icts) arc bought and so ld , and ob serves that
en viron m ental factors are frequently aitributcs o f those go o d s or factors. T hus, a fine view or the lev el o f air quality is an attribute or feature o f a h o u se , a risky
en viron m en t m ay be features o f c o iia in jo b s, and so on. It has long been
recogn ized that the value o f a p iece o f land is rcIatccLto the stream o f benefits to
s be derived from that land. AgricuHnr.-iI output and slicltcr arc the m ost ob viou s *
ii' o f such b en efits, but access to the w orkplace, to com m ercial am en ities and (O'environ m ental facilities such as pniks; and the environm ental quality o f the
n eighbourhood in wliicii the land is located are also im portant benefits which
accrue to the person w ho has the right to use a paiTiculnr p iece o f land. T he
property value appiciach to the m ea.snrcm cnf o f benefit estim ation is based on this
sim ple underlying assum ption. Clivcii that different localion.s have varied
. environm ental altrilm lcs, such variaiions will result in d ifferen ces in property
.values. W ith the u.sc o f appropriate siatistical tcchn i(|ucs the h ed on ic approach
attem pts to (a) identify how much o f ;i property differential is due to a particular
environ m ental differen ce betw een p io p crties and (b ) infer how m uch p e o p le are
142
Viiluc o f (lie ciiviruiiiiicnt
w illin g to p a y fo r an in ip ro v c in c n t in th e c iiv iio n n ie n ta J q u a lily tlia t llicy face a n d
w lm t tiie so cial v a lu e o f th e iin p ro v c in c n t is. D oth th e id e n tific a tio n a n d th e
in fe re n c e a c tiv itie s in v o lv e a n u m b e r o f issues wliicli a re d iscu ssed in so m e d e ta il
b e lo w '.
T h e id e n tific a tio n o f a p ro p e rty p ric e effect d u e to a d iffe re n c e in p o llu tio n
lev els is u su ally d o n e b y m e a n s o f a m u ltip le regression tecliiiiq u e in wliicJi d a ta arc
ta k e n e ith e r o n a sm all n u m b e r o f .similar re sid e n tia l p ro p e rtie s o v e r a p e rio d o f
y e a rs (tim e s e rie s ), o r o n a la rg e r n u m b e r o f d iv erse p ro p e rtie s a t a p o in t in lim e
(c ro ss s e c tio n ), o r o n b o th (p o o le d d a ta ). In jn a c lic e a lm o st all p ro p e r ty v alu e
s tu d ie s h a v e u se d c ro ss-se c tio n d a ta , as c o iilro llin g fo r o th e r in flu ciices o v e r tim e
is m u ch m o re d ifficu lt. In d o in g th e e x e rcise w h a t o n e is se e k in g to id e n tify is th e
c u rv e A B o f F ig u re 11.1 b elo w . T h is is th e rc h ilio n sh ip b e tw e e n th e level o f tlie
e n v iro n m e n ta l a ttr ib u te z, a n d llie p ric e o f th e re la te d m a rk e t p ro p e rty . I t re fle c ts
th e re s u lts o f a m a rk e t e q u ililjriu m b e tw e e n h o u se h o ld s w h o w ish to p u rc h a s e a
p r o p e r ly w ith a c e rta in level o f th e a ttrib u te z an d p r o p e r ty d e v e lo p e rs a n d
o w n e rs w ho su p p ly dw ellittgs a t d iffe re n t a ttrib u te levels. T h is ‘e q u ilib riu m ' is
r e p r e s e n te d in te rm s o f a se t o f p o in ts o f ta n g c n c y b e tw e e n th e in d iv id u a ls’ bid
c u rv e s a n d tlie s u p p lie rs ’ su p p ly , o r o ffe r, c u rv e s for h o u sin g w ith d iffe re n t levels
o f z. F o r a n y c h a n g e in th e a ttr ib u te , say fro n t Z| to Zj th e h o u s e h o ld ’s w illingness
to p a y fo r tiie im p ro v e m e n t w ould b e th e d ista n c e as in F ig u re 11.1, H o w e v e r, th e
e s tim a te d h e d o n ic m e th o d , using th e re su lts o f th e e c o n o m e tric e stim a tio n
d e sc rib e d a b o v e , w o u ld rc.sult in an o v cr-c.slim ution o f th e b e n e fits o f an
im p ro v e m e n t, o r a n u iid c rc s iim a lio n o f the co st o f a d c te n o r a lio ii^
FBOPEfUY V/UJUE
Figure 11,1 Hedonic prices, bid ntid offer functions.
143
A . M iir k a iitly a
H aving cstubJislicJ (bat t/ic rncl/i<KJ, applied as d e s c r ib e d a b o v e , w o u ld result
in an overestim ation o f the benefit, (lie questions that follow arc; (a) liow serious
is the overestim ate and (b) can it be corrected by adapting the m ethod in on e way
or.another? A s far as tlie m agnitude o f the bias is con cern ed , econ om ists have
.carried out sim ulation exercises w here the utility function representing consum er
preferences is specified explicitly, as arc tlic details o f the supply o f properties
with attribute z. O ne o f these has concluded (hat the h edonic estim ate o f benefits
could be as muc/i as tw o to three tim es the true willingness to p a y f o r the benefit^.
[n another study , two situations wci c com pared; ojic in wliich a vacant p iece o f
jrban land is to be d ev elo p ed (the ‘fir c cn fic ld C a se’) and the other in wliich an
;xisting site is to be im proved (the ‘D row nficld C ase’). In the first case the
villiout-projcct alternative w ould be to have squatter settlem en ts, w hereas in the
secon d case the w ilhout-projcct situation w ould be to have no change from the
status q u o. T h e study reports that the overstatem ent o f benefits in the G reenfield
case is m uch sm aller than in the D row nficld case. For exam p le, if the w ith-project
value is tw ice the w ilhout-projcct value, the overstatem ent in the G reen field case
is less than 507o, w hereas in the U row u fid d case it is over 1(H)%.
T h ese sim ulation results arc im creslin g and useful but tlicy also have (heir
lim itations. 7’lic coin |)lcxi(ics o f (he real situations cannot be replicated in m odels
w ith sim ple utility funcliuns and laiul m arkets. T hus, it is aisc) im portant to look
at tJie results o f actual hed on ic price .sludics and c o m p a r e them to those obtain ed
by oth er m ethods on the sam e data. A few such com pai isons have been d on e for
d ev elo p ed countries by lir o o k sh iie and others and sliow (hat, wiicrcn.s in one
study the h ed on ic estim ate was around three lim es that obtain ed by questionnaire
approach, in another it was actually (css than the questionnaire-based estimate^.
T h ere is no clear ev id en ce, th erefore, from actual em pirical stu dies, to sh ow that
the h ed on ic estim ate is consistently much higher than that obtain ed by other
m eth od s.
.
T h e secon d q u estion p o sed ab ove was w h ether (his bias could be corrected. In
his original article R osen had recogn ized the difficulty, and proposed a tw o-stage
p roced u re, in which the prices o f attribute z obtain ed from the estim ation as
described ab ove were then used to estim ate the bid functions. T h ere arc a few
stu dies in the U S that carry out this iw o stage estim ation procedure'*. H ow ever,
the estim ation problem s raised in doing so arc form idable, though not
insurm oun tab le. In particular it is ilifficult to ensure that the bid and offer
functions are identifiable from the c(|uilibrium price data as ob tain ed in (he first
stage estim ation . T h ese issues have l)ccn exam ined in great detail in previous
survey papers’ . In general their conclusion is that tlie tw o-stage estim ation
procedure can be carried o u t, with the use o f advanced techniques and skilled
econom etrician s and not on a routine basis. T h ere is nothing that has changed in
the last few years to disagree with this conclu sion.
T h ere are other difficulties with using the h ed on ic m ethod, ft can really o n ly b e
applied w hen h ou seholds arc aw are o f the costs or benefits o f the environm ental
attribute; and w hen llicy are able to luljust their residential locations to ch oose
w hatever com b inalioii o f attributes llicy want. The analyst has to ensure th ese
conditions are satisfied before em p loying the techn iqu e. O nce ap p lied , there arc
m any detailed dcci.sioiis that have to be m ade. A primary o n e is w licllicr to use
rental or properly price data. R ental |>ricc data arc Ihcoi clically llic better, but in
practice the rental m arket is less p c iio c t in som e countries. O n e advantage o f
using rental data is that property prices reflect not only current levels o f the
144
VuJiie o f rJic c iiv ii o iiin c iil
a ttrib u te bul fu tu re expected levels as well, Tltiis they m ay n o t give a clear idea o f
wJiat th e w illingness to pay for c u rre n t levels is'*.
In th e eco n o m etric e s tim a tio n , tlicrc arc the usual issues o f choice o f functional
fo rm , choice o f v ariables, etc. T h e choice o f functional form can result in
significant differen ces in the cstim alcd b enefits, even w hen tlic statistical tests
can n o t distinguish betw een the form s (i.e . both form s arc co n sidered accep tab le)
T h e accep ted 'b e s t’ practice lierc is to use the B o x -C o x tran sfo rm a tio n , allowing
th e form to be d eterm in ed by the d a ta . O nce the e q u atio n has been estim a te d , foi
ex am p le in log-linear fo rm , o n e n eeds to gel back to the original variables to
o b tain llic h ed o n ic prices in inoiicy term s. B ut th ere is a bias involved in the
tra n sfo rm a tio n . T aking the exam ple cited above, if tlic im pact of z on th e log of
th e price is cstim a lc d , taking the antilog of the cticfficicnt will give th e im pact of
z o n ihc
p rice, n o t th e m ean price, which is wliai isdc.sircd. T h e re a rc bias
c o rre c tio n in clh o d s availab le, but tlicse arc not always applied''.
O fte n th e h ed o n ic effect o f in terest is -not a co n tinuous variable bul a
d icliotom ous one - e.g. e ith e r a liousc has sew erage co n ncelion o r it docs n o ti
W hen th ere ore such v ariables as ex p lan ato ry factors, care has to be ta k e n '
in in te rp re tin g th e coefficients. T h e re arc iiiclliocJs developed for calculating tlie
relativ e chan g e in the price but again these arc n o t always carefully applied'*.
W h at can o n e conclude ab o u t the use of h edonic price m ctJiods from all this?
In p ractice, only th e firsl-slagc cstitnation is u.sually carried o u t and the results
used to o b ta in rough values for the im pact o f the a ttrib u te in q u estio n . It is
p ro b a b ly n o t w ortliw hilc asking for the second stage to be atte m p te d at this p o in t
- the d a ta and o th e r sources o f e rro r arc too g reat fo r the additional effort in this
d irectio n to be w o rthw hile. Som e o f the o th e r im p rovem ents in estim ation
p ro c e d u re — tlie use o f flexible functional form s, em ploying p ro p e r
tran sfo rm atio n p ro ced u res a n d , m ost im p o rtn iu o f all, including as m any o f the
re le v a n t variab les as possible - are certainly w orth u n d ertaking. B u t in ail this
discussion it is im p o rta n t to k eep th e issues in perspective. V irtually n/f estim ation
m e th o d s, including th o se identifying sim ple d em and and supply curves, w hich are
fre q u e n tly used in deriving an d estim ating benefits ou tsid e the environm ental
c o n te x t, w ould, if su b je c te d to the sort of scrutiny th a t has been ap plied h ere, be
fo u n d w anting in m an y resp ects. T lic desire and the need to im prove estim ation
m eth o d s should n o t lead one into throw ing the baby o u t with the bath w ater.
B en efit e stim atio n is n o t, an d p robably nev er will be, an exact science. For m a n y
app licatio n s ev en o b tain in g an o rd e r of m agnitude o f the benefits o r costs is
w orthw hile. H edoriic m e th o d s, applied judiciously, w here they are valid on
g ro u n d s o f fu n ctio n in g m a rk e ts an d well inform ed consum ers, have an im p o rtan t
ro le to p lay, especially w h ere large p ro je cts are involved and w hen th e d ata
collection costs can be ju stified .
A p p licatio n s o f this m e th o d have been successfully carried o u t in develo p ed
co u n tries, to estim ate th e costs o f air and noise p o llu tio n , and o f changes in
am enities. H o w ev er, th e ir use in developing countries has been m ore lim ited;
v aluation of th e b enefits o f sites and services is am ong the m ain ap plications to be
found. O nly now are th e studies o f the costs of a ir pollution using hedonic
m eth o d s being u n d e rta k e n in countries such as K orea, T hailand and M exico, In
th e agricultural se c to r, they have a potential usefulness in assessing the
capitalized benefits througli agricultural land o f changes in facilities such as
irrigation o r accessibility to m arkets b u t no m a jo r applications have b e en found.
H en c e th eir use is expan d in g in tlic developing country context and m ore
145
A . M n rk a itcJ y n
experience can be expected to be (jiiincd in coiincctioti willi the resource-related
projccls in llic nciir future.
MARKET BASED METHODS: CONTINGENT VALUATION
The contingent valuation nielbod (CVM ) uses a direct approncb ~ il bnsically asks
people what they arc willing to pay for a benefit, and/or what they are willing to
receive by way o f coinpcnsation to tolerate a cost. What is sought arc the personal
valuations o f the respondent for inei cases or decreases in the quantity of som e
good, contingent upon a hypothetical market. Respondents say what is the
maximum they would be wilting to pay (W TP) for an environmental jiiiprovcmcnt
or the niiniinum (hey would be willing to accept (W TA ) for a decline in
enviroiimcntul quality if a market existed for (he good in question. Alternatively,
they might be asked whether they arc willing to pay or willing to accept a
particular figure, A contingent market is taken to include not just the good itself
(an improved view , better water quality, etc.), but also the institutional context
in which it would be provided, and the way in which it would be financed.
The aim o f the CVM is to elicit valuations - or ‘bids’ which are close to those
that would be revealed if an actual ;j);irket existed. The JiypothcticaJ m a r k e t-th e
questioner, questionnaire and respondent - must therefore be as close as possible
to a real market. The respondent iiui.sl, for exam ple, be familiar with the good in
question. If the good is improved scenic visibility, lliis might be achieved by
showing the respondent photographs o f the view willi and without particular
levels of pollution or, if the good i.s an improvcm ciil in water quality, he must
appreciate in terms that are familiar to him, wliat lliis m eans. 'I'hc design of a
contingent valuation is now a professional activity, in which several points o f
design and implementation have been stressed.
'The first issue is what form the survey should take. Should it be a personal
interview , a mail survey or a telephone interview? The personal interview is the
m ost com m on and favoured inetltod although it can be quite expensive. Mail
surveys have, how ever, also been used with som e success in the US . The second
is the way in which the change will he carried out. Will it be the responsibility o f
a particular agency, and how will it he paid for? These factors could influence the
answers received. Third is the m ctliod by which the WTP or W TA is measured.
There are three broad m ethods tiial have been used. The first is a simple question:
wliat is your maximum WTP o r iniiiitiiuni W TA? T/ic second is the use o f an
iterated procedure, where the inlciview er starts with a given figure and asks
w hether the WTP i.s equal to or iinuc or less than that. If it is more he increases
(lie figure and if it is less he dccrca.sc.s it, carrying on until the desired answer is
reached. Tliis inctliod falls under the title o f bidding gam es. Finally, there is a
sim ple presentation o f impact and WTP or W TA and the respondent is simply
asked whctlier he or she is willing to pay that sum , or willing to accept that sum,
Tlie answer, yesor no, i.s recorded and no further question is asked. Naturally (his
nictliod yields less informalton bul it can be analysed using discrete data
techniques and is less prone to the kinds o f biases discussed below.
Since the use o f contingent valuaiion inctliods was introduced in the early
1970s, a lot o f work lias been done to identify biases or sources of error in the
estim ates. These have been classified in the following categories: hypothetical
context bias, information bias, strategic bias, and policy or vehicle of payment
bias‘d.
Hypothetical bia.s is said to arise for the simple rca.soii tliul (lie situation being
'
146
Vsilue o f Ihc c iiv jro iitiic iit
described is iiypolJicliciil and ilic WTJ* or W l'A figures nrc not acluiiJly paid o r
received. ]ii an altcnipt to m easure tliis, econom ists liavc com pared tlic results of
contiiigciit valuation aiiswci.s witli tliosc fiojn c;<pcrimcnts wlicrc actual
paym ents were to be made or received. Tlic earliest of tlicsc involved the issue of
hunting perm its and later ones eon.sislcd of cspcrim cntal situations involving
actual and liypotlieticai payiiieiUs for accepting or n o t having to drink an
unpleasant tasting liquid. The results showed that, w hereas for W IT the results
o f the actual and hypothetical experim ents were c[uite close, for W TA they were
different by an am ount that was statistically significant. F urtherm ore, th ere was
a difference betw een W TP and W TA figures that was larger than would be
justified on theoretical grounds. This distinction betw een W TP and W TA will be
retu rn ed to latcr*^.
' F or carefully-designed sludics liypotheticnl bias can be kep t wiliiin acceptable
bounds for m easuring W TP if certain condilions, which can be broadly described
as the ‘reference operating conditions’, are satis tied. First, the choices presented
m ust be as close as possible to actual choices, including the policies that are being
followed. Second, complex inform ation rcgardijig the choices has to be passed on
carefully, in term s that are conrprchcnsiblc to the respondent and without too
strict a tim e constraint. Third, the respondent has to have enough lim e to
form ulate his or h er response. Kcccnt research has indicated the im portance of all
tliese factors
Inform ation bias arises for reasons very siinilai' to hypothetical bias but the term
is used in the contingent valuation literature to refer to biases arising from the
form at design rath er than those arising from (lie context o f the actual choices
involved. Biases are found to arise, for exam ple, in bidding gam es based on the
initial bid proposed - Iheso-called starting point bias. T he final response achieved
has been found to be influenced by that starling point. This can be avoided by
checking fo r a relationship betw een iJie Iwo during the prclesling of llie
questionnaire, and adjusting the design accordingly. Pretesting the questionnaire
is, of course, an essential feature, o f any contingent valuation exercise. A n other
source of inform ation bias is said to arise because the responses are sensitive to
the m ethod of paym ent for the im provem ent tlmt is proposed - e.g. surcharges,
utility fees, taxes, etc.; and lo the agency that is identified as carrying out the
im provem ents. It is not clear, how ever, w liclbcr these differences are really
‘biases’ or represent m eaningful divergencies reflecting the fact (hat W TP is
contingent on how the paym ents arc to be m ade. R ecent studies of contingent
valuation have, how ever, tended to avOid reference to specific paym ent
vehicles'^.
Much of the bias associated with form at design can be elim inated by using the
discrete ‘accept—reject’ form at which, according to recent evidence, gives the best
value estim ates. W ith such a procedure there is no need lo undertake a bidding
procedure o r any o th e r iterated procedure where subsequent questions are based
on previous ones. It seems (hat this is very much liic direction in which contingent
valuation is going, althougli it places the sam e burden on defining the problem
fully and clearly for the respondent and giving him or h er enough lim e to
form ulate a response.
Finally there is the issue of strategic bias. This is said to arise from the
individual's desire to infiuencc the outcom e of the study, for his o r her personal
■benefit. Ecoiiomisls have long believed that strategic bias was a serious
im pedim ent to the use of survey and questionnaire m ethods, but the em pirical
evidence docs not Support this. M oreover, there arc now design m ethods
147
A . M iir k n titly n
available that provide incciuivcs lor iruth tcliing. Expcriinciils using these
m eth ods have revealed that even wiiii i|uitc weak incctitivcs for li uili telling, o n e
can o v e r c o m e (lie p icsciicc ofstrutcj>ic behaviour. 'I'hiis this issue d o c s not remain
a problem in well designed studies .
T h e final m eth odological issue that rcinains is that o f the discrepancy betw een
W T F and W l ’A . J he empirical evid en ce strongly indicates that answers to
questions about willingness to acccjU com pensation for a loss o f am enity yield
much higher answers than t[ucs(ions about the willingness to pay to retain the
sam e am enity o n c e it is there. On the basis o f e c o n o m ic theory the differences
b etw een the tw o sliould not be that large. G iven tJic general ten d en cy for W T P to
be m ore consistent and plausible, researchers have tended to use them rather than
W T A figures, e v en w hen the situation being valued involved a loss o f am enity
(th e q u estio n w o u ld then be p o sed as what are you willing to p a y to p reven t the
loss).
<The reasons w hy W T A and W T F differ as much as th ey do are not fully
u n d erstoo d . O n e explanation is based on the assum ption that W T A questions
n e e d m ore tim e to be properly un derstood and assim ilated. S o m e experim ents
h a v e show n that, in an iterative bidding process, the tw o differed considerably,
but that they c o m e closer together in successive iterations. O thers, h o w e v e r, have
argued that the differences arc m eaningful and indicate that a person n e e d s m ore
in the w ay o f c o m p en sa tio n for what he is going to lose than he is willing to pay
for wiiat lie might get - because what matters is not the final set o f g o o d s and
services that a person luis, but llic c/itj/iges in tlic set relative to s o m e reference
point. That reference point is often the s/atus quo and losses from it have a higher
value than gains o f equal m agnitude to it. TJiis approach, which is based on
psychological prospect tlicory, has been put forward as, an explanation o f the
discrepancy b etw een W T F and W 1 'A ‘^.
7 lie iniplicalions o f acccpliug tJie differences as real arc that o n e should not use
the lo w er W T F figures w hen valuing a loss in environm ental benefit. This in turn
w o u ld lead to higher values for coiisci vatiuii projects. At present the debate is
un resolved and (he tend en cy rciiia/n.s (o use W’fF . O n e reason for (his is purely
practical. A lth o u g h W T A figures arc higher, they arc also m ore varied, with sonic
individuals staling extrem ely high W TAs (in the millions o f dollars), and others
stating that no sum would compcii.sale them for the loss. U nless one w ishes to give
such individuals the right effectively to v eto any ch an ge, it is hard to see how
W T A can be practically applied for losses o f uincnity.
In tJie em pirical evaluation, a very large part o f the literature on C V M is taken
up with discussion about its ‘accuracy’. A ccuracy is not easy to define. Since the
basic aim o f C V M is to elicit ‘real’ values, a bid will be accurate if it coincides
(witliin reason) wilJi o ne that would le.suJt if an actual market existed . But since
actual markets do not exist ex /lypoj/icsi (otherw ise there w ould be n o reason to
use the tech n iq u e), accuracy must be tested by seeing that;
• the resulting bid is similar to that achieved by o th er techniques based on
surrogate markets (h ouse price approach, w age studies, etc.);
• the resulting bid is similar to o n e achieved by introducing the kinds o f
incentives that exist in real markets to reveal preference.
S o m e com m en ts have alrctidy been m ade o n the relationship betw een hedonic
148
Value of (lie ciiviroiiinciit
e s tim a te s aiitl th o s e o f C V M a n d o th e r n ie lh o d s. A c o tn p a riso ii b e tw e e n C V M
a n d m e th o d s su c h as th e trav el co st, o r (he use o f d o sc -rc sp o n sc te c h n iq u e s
re v e a ls th a t, in m o s t cases, liic rc is b ro a d co n sisten cy b e tw e e n th e se m e th o d s.
C o n siste n c y is ta k e n lic rc to m e an th a t (lie csliiiin tcs a rc g e n e ra lly w itliin p lu s o r
m in u s 100 p e r cen t o f e a c h oilier*”. 1 h at m ay sc c n i to b e a larg e ra n g e b u t, in th e
c o n te x t o f th e g e n e ra l u n c e rta in tie s su rro u n tlin g su ch e stim a tio n , it sh o u ld be
re g a rd e d as p ro v id in g useful in fo rm a iio n to (he d ec isio n -m iik c r. O n e su sp e c ts
th a t if th e a p p lic a tio n o f C V M a n d (he a lte rn a tiv e m e th o d w e re sc ru tin ise d m o re
clo sely , o n e c o u ld re d u c e tiiis ra n g e e v e n m o re .
C V M h a s b e e n u se d e x te n siv ely to elicit v alu e s o f im p ro v e m e n ts in w a te r
q u a lity , th e b e n e fits o f less air p o llu tio n , a n d tlic o p tio n a n d ex iste n c e v a lu e s of
sp e c ie s a n d sites. V alu es fo r th e la tte r h a v e b een fo u n d to b e very la rg e in stu d ie s
c o n d u c te d in th e U n ite d S ta le s, G e rm a n y a n d tlic S can d in a v ia n c o u n trie s , a n d on
th e v a lu a tio n o f n a tu ra l re so u rc e s lo c a te d in d e v e lo p in g c o u n trie s by th e re sid e n ts
o f d e v e lo p e d c o u n trie s . T h u s w illingness to pay fo r th e c o n se rv a tio n o f rain
fo re s ts , th ro u g h C V M a n d o th e r m e th o d s, has b e e n e s tim a te d a t as m uch as $8 p e r
a d u lt in th e U n ite d S ta te s . I h c r c is so n ic c o n tro v e rsy a b o u t su ch e stim a te s
re g a rd in g w Jietlier th e y ta k e e n o u g h a c c o u n t o f (lie a g g re g a tio n p ro b le m re fe rre d
to e a rlie r in th is p a p e r (i.e . th a t su ch fig u res c a n n o t be a d d e d to C V M a n d o th e r
e s tim a te s o f W r p fo r c o n s e rv a tio n b e c a u se th e i csp o iid c iit is n o t assu m in g tlia t he
h a s to p a y fo r all th e se ite m s) b u l th e y a rc n c v c rtlic lc ss in d ica tiv e o f a large
c o n s e rv a tio n e x iste n c e v alu e.
U n til re c e n tly , th e u se o f su ch tcc h n itiu es in d e v e lo p in g c o u n trie s w as b e lie v e d
to b e v e ry d iffic u lt, if n o t im p o ssib le , d u e to ilie so p h istic a tio n o f (h e ‘as if’
e x p e rim e n ts in v o lv e d . H o w e v e r, so m e rec e n t w o rk h a s b een c a rrie d o u t o n th e
v a lu a tio n o f w a te r, se w e ra g e a n d to u rism b e n e fits at th e ID E (in se v e ra l L a tin
A m e ric a n c o u n trie s ) a n d o n w a te r su p p ly a t tlic W o rld B a n k in B ra z il, In d ia ,
N ig e ria , P a k is ta n , T a n z a n ia a n d Z im b a b w e . T h e W o rld B a n k stu d ie s w ere
sp e c ia lly d e sig n e d to in v e s tig a te th e p o ssib ility o f using c o n tin g e n t v a lu a tio n in
d e v e lo p in g c o u n trie s a n d th e p ro g ra m sh o w ed th a t th e te c h n iq u e ca n in d e e d be
effe c tiv ely e m p lo y e d in tlia t context*^.
W h a t can o n e c o n c lu d e a b o u t C V nictliod.sV T h e te c h n iq u e , w hich su ffe re d
fro m a c re d ib ility p ro b le m fo r m an y y e a rs, h a s now re a c h e d a s ta te o f m a tu rity
th a t sh o u ld e n a b le it to o v e rc o m e th a t p ro b le m . O n e o f its s tro n g a d v a n ta g e s is its
v e rsa tility — it c a n , in p rin c ip le , b e used in all c irc u m stan c es. T h e p ro fe ssio n a l
c o n se n su s is iJiat C V M c a n p ro v id e re a so n a b le and in te re stin g d a ta o n b e n e fits o r
c o sts, b u t th a t th e s tu d ie s liav c to b e c o n d u c te d w ith g re a t c a r e , a n d th e
r e s p o n d e n t h a s to be v ery fu m iliar w itli th e su b je c t m a tte r o f th e v a lu a tio n . T lic
view s o n th e re le v a n c e o f this m e th o d a rc ih c ic fo rc c h an g in g fast a n d it is q u ite
lik ely th a t its use will e x te n d to o th e r a re a s in (lie v a lu a tio n o f e n v iro n m e n ta l
b e n e fits in d ev e lo p in g c o u n trie s.
M A R K E T B A S E D M E T ilO D S ; T R A V E L C O S T A rR R O A C U E S
T ra v e l co st m o d e ls a re b a se d on an e x te n sio n o f the th e o ry o f c o n s u m e r d e m a n d
in w hich sp ecial a tte n tio n is p a id to th e value o f lim c an d th e c h o ic e of.site visits.
T h e y a re used to v alu e th e b e n e fits o f im p ro v e m e n ts in re c re a tio n a l facilities in
p a r k s , o r th e v alu es o f c u ltu ra l sites th a t a re visi led by p e o p le fro m m an y d iffe re n t
lo c a tio n s. N u m e ro u s a p p lic a tio n s exist fo r th e U S , a n d so m e fo r E u ro p e an d
A u s tra lia . In d e v e lo p in g c o u n trie s, so m e m o d e ls a re b e in g u se d to e stim a te
b e n e fits fro m to u rism d e v e lo p m e n t in co u n trie s w ith g a m e p a rk s (such as K e n y a ),
149
A. M iirkandya
or special trekking areas (sucli as N ep a l). A nolJier area o f appJicalions has b een
to value benefits o f fu elw ood supply (or the supply o f replacem ents such as
k e r o sen e), w here iiouseholtis ‘p a y ’ for the fu elw ood by spending tim e collectin g
it (as was recently d on e in Z im b ab w e).
T /ie essential issues regarding benefit estim ation in travel cost m od els can be
view ed in Figures 11.2 and 11.3. O n e assum es that there is a dem and for the
services o f a particular site, which arc contingent on llic attributes o f that s ite , and
o f oth er sites offering sim ilar services. A n cxain pic m ay be visits to b each es, or to
a gam e park. T h e alternatives will depend on w h o is m aking the visits. For local
residents the alternatives arc other sites in the vicinity. For foreign tourists there
will be oth er sites in the country, and conceivably in other countries offering
sim ilar pack ages o f facilities. In ail these cases the ol)jcctivc is to estim ate the
relevant dem and cu rves, and then value the increase in w elfare as a result o f the
p r o je c t, which is ex p e c te d to result in a shift in the dem and curve and perhaps in
a ch an ge in the price. T h e 'price' referred to here is not som eth in g that can be
m easured just in term s o f what ojic ha.s to pay to enter the site. T h ere m ay be no
such p aym en t, and in any ease Ilial |niym ciit is only a .sjnall part o f the total cost.
T h e oth er item s that m ake up tlic price are the lim e taken to get to the site , and
the costs o f gettin g there. A n im portant part o f the travel cost m eth od is the
estim ation o f that price. T h e ipcrcasc in w elfare in Figure 11.2, as a result o f an
im p rovem en t in the quality o f tfic site, is given ap p ro x im a tely by the shaded area.
T h e reason why it is only approxim ate is discussed later.
In d ev elo p in g cou n tries on e is also in te re ste d in using tliis m eth od to estim ate
points on a dem and curve for a com m od ity such as w ater or fu elw o o d . For m any
p e o p le such com m od ities arc d elivered and the consum er pays for th e delivery as
w ell as the com m odity. But others have to collect flic com m od ity, in which case
there m ay be n o m o n ey charge on ce it has been collected . T h e collection tim e can
b e quite significant a part o f the p erson ’s total tim e available, and has an
opportunity cost that can be nica-siircd. I'liat opportunity cost gives the implicit price
o f (he com m odity and can be used to value, for exam ple, Ih c introduction o f delivery
system s, which convert a time cost lo a m oney cost. In Figure 11.3 the b c n c filso f the
introduction o f such a system at a price FI arc shown in the shaded area.
T h e t h e o r y a n d p r a c t i c e o f c .s tlm a lin g t h e d c i n a n d c u r v e s a s s h o w n in F ig u r e
1 1 .2 h a s b e e n d e v e l o p e d c o n .s id c r a b ly s in c e th e 1900.S, w h e n t h e f ir s t s e r i o u s
e s t i m a t e s w e r e c a r r i e d o u t ’". B r o a d ly s p e a k i n g I h c issues can b e d i v i d e d i n t o
t l i o s c r e l a t i n g l o t h e e s t i m a t i o n n u - lh o d s a n d tlio s c r e l a t i n g to t h e w e lf a r e
i m p J i c a ti o n s o f t h e c .s lin ia lc d c c p i.a lio n s — i.e . Ik ) w c a n m ic o b t a i n a n c .s liin a lc o f
t h e b e n e f i t s o r c o s ts a s s o c i a t e d w ith a n y g iv e n c h a n g e o n c e t h e d e m a n d c u r v e s
h a v e b e e n e s t i m a t e d / H a c li o f Ihc.sc a r e c o n s i d e r e d b e lo w .
EM PIR ICAL ISSUES
W fiichcvcr m eth od is used to csliin atc (he dem and for .site .services, o n e o f the key
question s is what value should be attached to tim e. Several stu dies sh ow that the
estim ated param eters, as well as the c.stiiiiated ben efits o f any clinngcs, are highly
sen sitive to the assum ed value o f tim e’ *. It is usual to take b etw een a quarter and
a h a lf o f the average w age as the appropriate value, with a third being the m ost
com m on fraction used. G iven the sensitivity o f the results to this param eter it is
im portant to evalu ate the case for a given figure carefully, taking account o f the
circum stances that are relevant to the application in q u estion . A n
u n d erestim ation o f the tim e costs results in dem and being estim ated as m ore
150
Viilue of tlic ciivirOniiieiit
COST PEfl VISIT
F ig u r e 11.2 U c iie lil c s tin in tio ii fro m in iv c l c o st m o d e ls.
■ PRICE* O P W A T H l
th e sh ad ed a r ea
f lE P R E s e w r S THE DENEfTTS O F p r o v i d i n g W A TER VTA A D E U V E R Y
S Y ST E M TO SOMEONE WHO Pn£V IO U Sl.Y HAD TO C O LLEC T IT
Figure 11.3 Benefit estimation using travel cost models.
151
A. Miii kiiiidya
sen sitive to m on ey costs than it really is, wlticli w ould liave an effect on the
m easured w elfare.
T h e m od els used for the csliin atioii o f recreational benefits (w hich have been
the m am application o f travel cost m od els) can be classified into tw o groups continu ous variable sp ecification s and discrete variable sp ecification s. In the
form er the num ber o f visits to a site arc treated as Ific d ep en d en t variable, with
liou seliold characteristics as cxjilanalory variables. I ’his is o f course extrem ely
dem anding o f d ata, as o n e n eed s to know w lio visited the site, w here they cam e
from and what tiicir personal circum stances w ere. In addition there are the
problem s o f how to treat different lengths o f visit, and how to deal with the fact
that th ose w h o do visit are on ly a fraction o f the set o f p oten tial visitors. Ideally
o n e should estim ate both the nim ibcr o f visils and letigth o f each visit
sim u ltan eou sly but this is difficult to do. Ignoring the length o f each visit w ould
result in a bias, if for exam p le those w ho cam e from far aw ay spend considerably
lon ger at the site. Then their cost per unit o f tim e spent w ould be low er than was
estim ated assum ing equal tim e, and ihc resulting dem and curve w oufd be steep er
than the true o n e . A n ER A study exam in ed the bias resulting from this issue and
fou n d that ignoring the tim e spent on the site resulted in an ovcrcstu n ation o f the
num ber o f v isils. b u t the effect was sm all and the im pact on the slo p e o f the
estim ated dciiiam l curve was n egligible. M cncc the issue did not em erge as o f
great iniportancc^'^.
M ore seriou s, h ow ever, is the liias resulting from (Jjc fact (hat the estim ated
dem and eq u ation is based on data b o m hou seh old s tliat Jiavc m ade a visit and
ign ores th ose that did not m ake o n e , 'I'his so-called truncation bias results in tJic
estim ated dem and curve in Figure 11.2 being flatter tlian the true dem and curve
and therefore the change in surplus being larger than the true change. M ethod s
are available to correct the bias resulting from truncation, which arc not
particularly data-Jumgry and w hen applied result in noticciihly different cslim a lcs
o f the b en efits. Thus it is im portant to m ake this correction .
H aving estim ated the dem and function for a site, how d o cs on e then find the
shift in that function as result o f change in the site attributes? Ideally one should
estim ate the d em and for all relevant sites sitm illan cou sly, including as
exp lanatory factors the attributes o f the sites, sucii as q ualily o f the w ater,
facilities availab le, etc. B u t this is im p ossible to d o in practice. O n e alternative
approach has been to estim ate the dem and for each site sep arately, including as
an exp lan atory variable the cost and attributes o f (he ‘next best site ’. H o w ev er,
this is arbitrary and not very satisfactory. T h e m ost prom ising procedure used so
far has been to estim ate the dcniantl for each site sep arately as a function o f the
characteristics o f the h ou seh old , and then exam ine how the dciiiniid param eters
vary across sites according to the attributes o f (he sites. For exam p le, in each
dem and eq u ation o n e w ould have a coefficien t relating the num ber o f visits to the
price. 7'hat coefficien t w ould vary across sites and one might find, for exam p le,
that an increase in d issolved oxygen w ould raise the value o f that co efficien t. In
term s o f Figure 11.2, (liis w ould be c<iuivalcnt to saying that an im provem ent in
w ater quality shifts the slo p e o f the dem and curve m aking it sle e p e r . T his
inform ation can then be used to c.itimatc the bcncfits^^, as has been d on e in the
U S but it is d e a r ly extrem ely dem anding in term s o f data.
W hen there arc m any sites and llic ch o ice b etw een them is d eterm in ed on
com p etitive grounds by consum ers, tlic continu ous variable m od els are probably
n o t the m ost suitable o n e s, and it w ould be b etter to turn to the discrete ch oice
152
Value of tlic ciivirouiiiciit
■
altern ativ es. T h e ran d o m utility m odel (R U M ) is especially su ited to the (ask of
identifying tlic clioice am ong siihslitutc sites. In one o f its m ost p o p u la r form s it
g e n e ra te s the im illiiiom ial logit e q u atio n , wliicli defines the p ro b ab ility th at a
p articu lar site will be visited, as function o f the attrib u tes of liiat and o th e r sites,
an d tlie characteristics o f (lie household. O n e of its iiinitatious, ho w ev er, is th at
it can n o t then explain the fre q u en cy of visits to a site (i.e. how m any tim es the
p e rso n visits a site in a seaso n ). T his can he o v ercom e hy attach in g to tlic
m ultinom ial e q u a tio n a sing/e continuous d cm u n d equation fo r trips Co all sites.
T lie o th e r serio u s lim itation o f the sim ple m ultinom ial form is its assum ption th a t
th e relative chances o f any two sites hciiig chosen are in d e p e n d e n t o f all o th e r
sites (th e so-called in d e p e n d e n ce of irrelev an t altern ativ es). T his will be violated
w hen choices are m ad e in a seq u en tial ord er. F o r exam ple, o n e m ight decide
e ith e r to go to a b each in region A o r go to a gam e p a rk in region B. O n ce th at
decision has been m ad e, th e nex t o n e w ould be to choose am ong the beaclics o r
gam e p ark s. This is re fe rred to as the n este d m ultinom ial logit and has been used
in th e re c re atio n a l literatu re^’. A gain d a ta rciju ircm cn ls arc q u ite form idable,
ho w ev er, an d it is unlikely that they will be saii.sficd in m ost developing country
co n tex ts, altliougli it is becom ing generally acknow ledged that the com bination of
th e R U M a n d the single d em and e q u atio n is probably the best in term s of
estim ating d e m a n d fo r recreatio n al sites.
W E L F A R E IS S U E S
H aving estim ated [he d em an d for each site e ith e r in co n tin u o u s o r discrete or
d iscrete cu m co n tin u o u s term s, th e next question is how to use th a t in form ation
to estim ate th e ben efits o f changes in en v iro n m en tal quality. In tlic co n tinuous
case o n e n eed s first to estim ate the sliift in the d em and curve an d then try an d
estim ate th e sh ad ed a rea in F igure H .2 . H ow ever, there arc som e p roblem s
associated w ith d o in g th a t. T hese are n o t easy to explain in a non technical way,
b u t essentially th e y arise because th e benefits o f a quality im p ro v em e n t as .
m easu red by th e sh ad ed a re a in tliat figure are only an app ro x im atio n to th e true
b en efits, w hich sh o u ld be m easu red on a related bul d iffe re n t d em a n d curve (th e
co m p en sated d e m a n d c u rv e ), N orm aliy the e rro rs involved in using tlic em pirical
d em an d cu rv e as it is e stim ated from the d a ta arc sm all, but in Itie case o f quality
ch an g es, th at can n o lo n g e r be g u a ra n te e d . H ence o n e should go back to the
underlying utility fu n ctio n on wliicli the d e m an d functions a re b ased. B u t lliis is
n o t always possib le, as th e la tte r are n o t specified, especially with th e quality
variables inciuded^^. T h eo retically this is an issue, b u t how im p o rta n t it is lias not
yet b een d e a rly established.
In the d iscrete m od els, th e m easu rem ciil o f the benefits has to be based on the
ran d o m utility m odel. A s its nam e suggests, it assum es th a t th e in d iv id u al's utility
is a ran d o m function o f incom e and eoiisum ption. T h e w elfare m ea su re is th en
based on finding th e incom e change that co m p en sates the individual fo r the
change in th e en v iro n m en tal qu ality, taking the average o r expected u tilily in each
case, This m e th o d h as now been developed and ap p lied in recreatio n m odel
b en efit e stim atio n and can he used to estim ate t h e . benefits o f introducing
new sites as well as elim inating existing ones, som ething that can n o t be d o n e with
th e co n tin u o u s m odels alo n e .
W h at can o n e say in conclusion a b o u t travel cost m odels? T h e first p o in t to n o te
is th a t, in th e context of d ev eloped countries, the m ost iiiiportant applications o f
tlie m e th o d a re w ith regard to recreatio n al benefits, w hereas in developing
153
A . M a rk a iid j'a
countries tliey arc in tJic csltinaliuii of the dcinand for jjroducis such as w ater and
fuelw ood. F or tliis purpose, m uch tlic most critical issue is Ihe valuation of lime.
T h ere are som e general guidelines available for this hi standard textbooks, but
each case is special and the local circum stances m ust be taken into account.
H ow ever, rccreaiional bcncfils are becom ing im portant even in developing
countries, espcciaJJy those w here tlicrc is an im portant tourist trade. F o r these,
investm ents in im provem ents in quality and infrastructure need to be valued and
som e o f the m odels that have evolved in the US could be of use. In particular the
random utility model could be used lo estim ate dem and by site w ithout loo much
difficulty, as long as the data can be collected, which should be feasible. The m ore
am bitious syslein-w idc csliination o f site benefits as carried out in the US,
liow ever, m ust he considered to be virtually im possible to replicate in any of the
b o rro w er countries.
D O S E - R E S r O N S E R A S E D V A L U A l IO N P K O C E D U Ill^ S
Som etim es benefit estim ation tiiclliods do not seek to m easure the revealed
preferences for the environm ciilul good in question. Instead, they calculate a
‘d o se-rcsponsc’ rclalionsliip betw een pollution and som e effect, and only then is
som e m easure o f (lie econom ic value o f that effect applied. Exam ples of doseresponsc rclalionships include the effect of polhitroii on hctilth; (he effect of
pollution o n Ihc physical dcprcciatiuti o f matcriiil as.scls such as rnclals and
buildings; tlic effect o f pollulioii on aquatic ecosystem s, and the effect o f soil
erosion on agricuJlural yields.
In general the indirect valuation approach is always applicable to
environm ental problem s. Tliat is, if there is som e dam age and it is linked lo a
cause, tiie relationsliip betw een lhal cause and effect is a dose-rcsponse linkage.
O nce th e dose response relationship is established, indirect approaches then
utilize valuations which arc applied to the ‘responses’. F o r exam ple, consider the
linkage betw een w ater pollution and Jiealth. T hen, once the health effects are
established, a value o f life and/or of illness is applied. T he pro ced u re can be
sum m arized as follows:
(i) E stim ate a physical datnagc function of the form
R = R (P , other variables)
w here R is the physical dam age (the response), P is the pollution;
(ii) C alculate the coefficient of R on P througil (typically) statistical regression
analysis - i.e. calculate AR/AP (where A m eans ‘change in ’);
(iii) C alculate the change in pollution due lo environm ental p o lic y -i.e . calculate
AP;
(iv) C alculate V .A P.(A R /A P) = V. AR = AD, wlicrc AD is the ‘dam age avoided’
by the environm ental policy and is thus equal to (he benefits o f that policy.
Indirect procedures do not easily constitute a m ethod of finding willingness to pay
(W TP) for the cnvironm cnlal benefit (or the willingness to accept (W TA )
com pensation for cnvironm cnlal dam age su ffe re d )/F o r exam ple, one might find
that a certain program of soil coti.scrvation would reduce erosion by a certain
am ount and result in increased yields of existing crops o f an am ount that can also
be estim ated and valued using existing prices. H ow ever, there is no guarantee
th a t the farm ers would actually be willing to pay that am ount for (he benefits. Tlie
reason is that, with the new soil conditions, the pattern of crops grown would
154
V:iliic »r (lie ciiviroiiiiiciil
change, as would the prices (hey fctcli and farm ers would want to take account o f
Ihcsc changes, In an o th er cxarnpJc, suppose dial a disease eradication program
reduced the incidence of m alaria, so (hat the num ber o f work days lost could be
m easured. A n estim ate of tlic benefit based on valuing those days in term s of the
average wage (which has been used in tliis context) would not provide an accurate
estim ate o f the benefits because individuals’ willingness to pay of the reduced risk
will depend on how they value risk, as well as how they value (he discom fort and
inconvenience o f conli acliiig m alaria. T hese may bear no relation to the wage
costs o f the expected num ber of days lost.
^ T h e essential point here is that llic stop from ihc dosc-rcspoii.sc csliinatioii to
the valuation is not as simplistic as is often assum ed. In fact w hat is often needed
is to link the dosc-respoiise estim ates of tlic dam age to a behavioral m odel of the
dem and for (he products that are affected. In some of tlie m ore sopliisticatcd
studies using dose-rcsponse relationships this has been done, but in general it lias
lo t^ . O ften, the data simply do not perm it the cslim ation of the m ore refined
Tiodel, in which case even the sim pler m odels can be very useful providing tlieir
im itations are realised and the kinds of biases they are likely to g en erate arc
allowed for.
^ T h e dose response tends to be used particular ly for two reasons. T he first is
'w h en it is thought that people are unaw are of ihe effects that pollution causes.
Tlie second is when eliciting preferences by any one o f the direct m ethods is not
possibleifor reasons of data, or lack of ‘m arket .sophistication’ in Ihc population,
or b o th .lT h e second reason applies especially in developing countries, where
price and expenditure data are generally p o o r and w here, at least until now, the
use of contingent valuation techniques has been limited because it is believed th at
the answers would suffer from strategic, hypothetical and operational biases.
W here environnieiital benefit estim ation has been undertaken in developing
countries, it has overwhcliningly been o f (liis form. In the inlcniational donor
agencies, there are several examples of dose-rcsponse cslim ation m ethods,
especially related to agriculture. A few general points worth noting from these
are:
'
^ ' ........
(a) environm ental costs and benefits are estim ated m ainly for changes in
agriculture o u tp u t following land use and land m anagem ent program m es.
H ow ever, the dose-rcsponse relationships on which these are based are often
q u ite crude. F u rth erm o re, as has been discussed above, there is often no
allowance for the fact that individuals adapt to changes in their environm ent.
T hus, for exam ple, if soil conditions arc cxjicctcd to im prove as a result of a
p ro ject, farm ers will cliange to different inputs and grow different corps than
they did in p o o rer soil conditions. N ot allowing for such changes, and
assuming that the sam e inputs and output mixes will prevail would result in an
underestim ate of the benefits of such changes. 'I’his is because the changes
them selves are likely to generate further bcncrils;
(b) m any environm ental impacts arc not valued in lliesc exercises. T he reasons
for this range from a lack ol data to an unwillingness to use the appropriate
techniques. T he form er include benefits such as increased crop residues and
the spillover effects o f projects and health benefits from public health
program s. T he latter include benefits of conservation p erse.
155
A , Mjirkniiclyn
V A L U A T I O N O F M O R T A L i r Y I M I ’A C 'I'S
O n e o f tlie m ost iinportniit iiicas w here ciivironiDcnl.-il rtnpiicls occur is thsii of
h u m an iicallli. Clinngcs in a ir aiul w nlcr c|inilily IcniJ lo cJnuigcs in iJic iiiciilcncc
o f d iseases, th e in ip airin ciit o f iictiviiies and changes in life ex pectancy. V aluing
th e se im pacts re q u ire s on e to establish a link betw een the pollu tio n and a m easu re
o f h e a lth sta tu s; roi;,CKntnplc bctw ccti increases in SO^ an d increases in
p ro b a b ility o f d calli.jl io w ev c r, (lie next ste p , that o f valuing the change in health
sta tu s can vary co n sid erab ly . A t o n e ex trem e a rc c o m p reh en siv e m odels of
individual b e h a v io r, in which individuals o p tim iz e th e ir resp o n ses to
e n v iro n m e n ta l ch an g es th ro u g h a co m b in atio n o f m easu res - re lo ca tio n ,
in creased e x p e n d itu re s on a v crtiv c b eh av io r, increased m e d ic atio n , etc. A t th e
o th e r a re m o d els th a t ig n o re individual responses an d look in stea d a t m easu res of
lost p ro d u c tio n , in creased cost o f tre a tm e n t, etc. In betw een arc m odels th a t try
to in fe r W T P o n th e basis o f resp o n ses to sim ilar risks in o th e r situ atio n s (e.g. th e
h e d o n ic w age m e th o d ). T his section review s th ese in cllio d s and assesses th eir
relev an ce an d applicab ility in the developing co u n try c o n t e x t . '^
B e fo re discussing a lte rn a tiv e m ctb o d s o f m o rtality v a lu a tio n , it is im p o rta n t to
a d d re ss th e criticism s o f slu d ics that place m oney values on changes in m o rb id ity
a n d m o rta lity , especially th e la tte r. T h e se argue th a t, h u m an life being sa cre d , it
is b ey o n d (o r o u tsid e tlic scope of) inu iictary valualioii. M cncc a tte m p ts to d o th e
la tte r a re carrying benefit estim atio n to o far. W hile o n e can u n d e rsta n d (he
reaso n s for th e se criiicism s, th e ir focus is m isplaced. W hat o n e is valuing in.
stu d ies o f m o rta lity an d m o rb id ity is n o t a certain p e rso n 's w illingness to pay to
avoid dying so o n e r, o r su ffering a lo n g er p e rio d o f illness, b u t an in crease in the
risk o f this h a p p e n in g . L o o k ed a t in (liis w ay, it is a p p a re n t th a t individuals freely
u n d e rta k e actio n s w hich in crease th e ir risk o f d e ath o r illness, b ecau se th ey d erive
in co m e o r utility from th e associated actions. P articip atin g in a risky sp o rt, or
w o rk in g in a risky e n v iro n m e n t, o r travelling by a risky inode o f tra n sp o rt a re all
ex am p les.
S o m e confu sio n in this reg a rd in caused by the fact th a t th e econom ists
fre q u e n tly sp eak o f th e 'value o f life’, this is best show n by m eans o f an ex am ple.
S u p p o se th e p ro b ab ility o f d calli is reduced form 0.0002 to 0.0001 (i.e . by o n e in
ten th o u sa n d ). If (lie av erag e williiignes.s to pay for thi.s red u ctio n is 1 10, th en the
a v e ra g e valu e o f life fo r th a t g ro u p is defin ed as $10/10 ’ o r $ 1,000,000. T his is n o t
w h at any o n e ind iv id u al is willing to pay to avoid d e a th . R a th e r it is a su m m ary
w ay o f ex p ressin g , in o n e n u m b e r, a W f p a n d a c h an g e in p ro b a b ility . In this form
it can also be tra n s p o rte d to o th e r situ atio n s, u n fo rtu n ate ly n o t alw ays correctly.
F o r ex am p le, o n e m ight h av e a situ alio ii w here th ere was a change in p ro b ab ility
o f d e a th from O.OI to 0.02 (i.e . nii increase o f o n e in a iiu iid red ). If a p o p u la tio n
o f 1000 p e o p le w ere a ffe c ted , the W l'i’ fo r th e change could be calcu lated as
$0.01 X 1.000.000 X 1000 = $100,000,000
H o w e v e r, such a calcu latio n p resu p p o se s th a t (a) the figure o f $1,000,000 is
ap p licab le to this d ifferen t g ro u p , (b) a p ro b ab ility ch ange o f o n e in a h u n d re d ,
fro m a level o f o n e in a h u n d re d is sim ply 100 tim es the im pact o f a p ro b a b ility
change o f o n e in ten tlio u sa n d , from a level o f two in ten th o u sa n d .
T here is a c o n sid e ra b le lite ra tu re w hich arg u es th a t value o f life stu d ie s ca n n o t
oe tra n s p o rte d from o n e g ro u p to a n o th e r, and th at rea ctio n fo r ciian g es.in
p ro b ab ilities do not obey th e sim ple law from above. H cncc care n eeds to be
ta k e n in carry in g o u t e ith e r o f tlicsc m an o eu v res
156
'
V a l u e o f (lie c iiv iru ii i ii c ii t
In m ortality studies, two approaches have been adopted to valuing cliangcs in
risk. T he first which goes back a long tiinc^’ , calculates tlic prc.scii( value of gross
earnings of die individual over Iiis rem aining lifcliine and m ultiplies th a t by the
charge in risk*®, Tliis appm ach lias been widely used to estim ate benefits in
developed countries but in recent years it has been subject to mucli criticism, 7 bc
reason is tiiat it ignores individual own preferences, or the W TP for the reduction
in risk. A n o th e r is that it places a low value on tlic lives of die elderly (low
productivity) and children (coming too far iii tlic future’ *). Thus using this m ethod
o f valuation will oiidcrallocatc resources fo r program s that benefit these groups.
In ignoring willingness to pay, recent rcsearcli sliows that this m ethodgeneraily
underestim ates the benefits of a reduction in the visit of m ortality. H ow ever the
am ount by which it underestim ates it is unclear, o r too m odel-specific to be able
to be used as a general guide’^.
A lthough the alternative approach - i.e. tliat o f valuing W TP is theoretically
m ore satisfactory, it loo has several difficulties associated with it. Tw o of the
techniques discussed earlier in lids chapter have lieen used to value changes in the
W TP or W TA of the risk of death. T he first is the hcdonic-wagc approach, where
differences in wages are explained using (he hedonic m ethod, with one of the
variables being die occupational m ortality rate. Such studies face m any tecliiiical
difficulties” , but they do generate plausible values for the risk coefficient, and
thereby for a W TA -based value of life. T he o th e r is the use of CVM m ethods,
w here individuals respond to questionnaires as discussed earlier. T here is a
substantial literature on tiic use of die CVM approval in (his context wJdcli cannot
be sum m arised h e re ’^. H ow ever, the main issues that arise from botli hedonic and
p V M studies can be addressed. T hese are;
• how fa r do individual perceptions o f risk matcli the objective probabilities, and
w here die tw o differ, which should one lake?
• is the response to risk, as shown iti hedonic wage studies, relevant to the
response to risk as it would arise in an ciivironiucntal context?
• w hat is the reJevance of actual cxpciulilure on goods that reduce
eiiviroiiinciital risk?
• w hat are tlie effects of a latency period on the W TP for an increased risk of
d eath? In oth er w ords, liow would die W TP for som ething wliich affects die
curren t probability o f dying com pare to llic W TP fo r soniclhing which will
affect death probabilities in 20 years? and• w hat account, if any, should be taken of the W TP of others for the change in
note of d eath?
Each of these is addressed below.
T he relationship betw een subjective probabilities o f m ortality and the relative
frequencies, as obtained from em pirical data, varies considerably. R ecent studies
indicate that
(i) on labor m arkets, perceived probabilities tend to be higher than actual ones,
perhaps by as m uch as 50% ’ .
(il) th ere is a tendency to overestim ate low probabilities of death (e.g. radiation
risks) and overestim ate probabilities with higher frequencies ,
(iii) individuals distinguish betw een the probability of death as applied to a
population, and their own probability of death, which they underestim ate
(it-can’t-liap p cn -lo m e plicnoincnon) .
157
A. Markandya
T liere is a conflict licre betw een giving individual preferences full weiglit, even if
it is know n th a t they are ‘wrong* and taking the relative frequencies in calculating
th e costs and benefits of environm ental clianges. Given the uncertainty attached
to the relative frequencies as estim ates of objective probability, it is ap p ro p riate
to tak e th e perceived probabilities and try to influence them as much as possible
by providing the data on relative frequencies to (he affected population.
Tlie W T A risk at work m ay differ from the W TP for avoiding cnvirojim cntat
risks for a num ber of reasons. First, W TA and W TP differ, for the reasons given
jarlier in this chapter. Second, tlic pojiulations are not (lie sam e. In wage studies,
the wage differential betw een low and high risk occupations may be reduced
because th e high risk occupations arc chosen by individuals wlio have a low
aversion to risk. T hird, is there any analytical way in which the individual 'priccs‘
for the two risks can be related? In response to the la tte r it has been sliown that,
as long as m uch o f the risk in the two .situations are sim ilar, tlic W TP for the one
a n d the W TA for the o th e r should be approxim ately the sam e. H ow ever, as this
is often n o t the case, the transfer o f prices for risk cannot be m ade
straightforw ardly. All this suggests that hedonic wage studies have to be used with
extrem e care in arriving at the price to be attached to the environm ental risk o f
m ortality. T he 'b iases’ do not necessarily work in the sam e direction and there is
n o easy was to assess tlic extent of the biases.
Tlie use o f d ata on safety goods to value life is much m ore limited^®. H ow ever,
inform ation from tliis source can be valuable. If a person reduced the risks o f
d eath by a certain am ount C and undertakes an expenditure of $X in doing so, the
im plied W TP for life is SX/C . Such a calculation can offer an allernaltve way of
valuing risk. It would be useful to com pare tin's valuation with the hedonic wage
valuation b u t no single study has allem plcd that.
So far th e discussion of W TP lias ignored tlie tim e dim ension. H ow ever, for
m any environm ental impacts tin's can be im portant. A ctio n s today can influence
the probability of death many years from now . In o rd er lo analyse these im pacts.
C ro p p er and Sussmaii and F reem an (am ong others) liavc developed a life cycle
m odel o f th e W TP at tim e fo r a change in the conditional probability o f dying at
age®*'. T h e m odel sliows th at, as expected, a latency period reduced W TP and the
lo n g er th e latency p eriod Ihc sm aller is W TP. T he cxiciil of the decline as a
function o f th e length o f period can be w orked out in term s o f a discount factor,
which is itself a com bination of tlic riskless rate of interest and the conditional
probabilities o f d eath.
T h e final issue is how should o/tc lake account o f Ihc im pact o f o n e individual’s
d eath on oth ers. Should one add soinclliing for the pain and suffering caused to
o thers? O ne way in which such imjiaets arc allow ed is through provision by
b equest. If an individual m akes sucJi a provision then his W TP will reflect, in p a rt,
the value o f his survival to his heirs. H ow ever, not all indirect efforts arc captured
by such a m eclianism and there may well be o th e r im pacts that need lo be
accounted for. In general the curi enl Iheoicticul rcscarcli arguc.s against including
such values, unless the context in which they are considered is fully specified. As
Bergstrom Jias p o in ted out, an individual may attach sonic welfare to the life o f
another person, but he also attaches sonic value to the additional consum ption he
will^obtain in the event o f the fo rm er’s death. Thus botli effects should be allowed
[or . H ence, in the absence of a satisfactory fram ew ork for looking at
nterpersonai effects it is recom m ended that they be excluded from any
:alculations.
158
Value uf the enviruiiiiienl
CONCLUSIONS ON THE VALUA TION OF MORTALITY EFFECTS
Valuing reductions in the risk of m ortality is an im portant p art o f valuing
environm ental impacts. Doing so is not inliimian, but part of a process that
individuals undertake all the time in tiieir private lives. H ow ever, the processes
for doing so are com plicated. Ideally one should try and m easure the W TP for the
reductions, based on pcrsoriai preferences. This can be approached via the
hedonic wage m etliod, a CVM m ethod, o r by looking at averlive expenditures. O f
Ih p e , the first raises m any problem s of tiic iiansferability of the estim ates to
situations of environm ental risk. A lthough sucli estim ates have been used lliey
m ust rem ain suspect on these grounds. In addition, the use of this m ethod in
developing countries, when Jtibour m arkets arc less well developed, is certain to
be even less satisfactory.
O th er m ethods o f valuation can be used in developing countries. T he easiest
would be to take a forgone earnings approach. Its lim itations arc known and have
been discussed, but it docs jirovide a lower bound to the benefits. Im puted
earnings can be used for non-wagcd groups and low discount rates can avoid
biases against safety program s that benefit cliildrcn. A lternatives such as CVM
and averting expenditures may also be applicable, but each silualion would need
to be looked at in detail. In particular, with the CVM m ethod a pro p er
understanding of the risk involved is csscmiai if the inetiiod is to yield seiisibJe
results.
VALUATION OF MORBIDITY IM PACIS
The valuation o f m orbidity changes caused by pullutiun is m ore difficult than the
valuation o f m ortality changes, principally because m orbidity m anifests itself in
m ore ways and lias a tim e dim ension. In ad d itio n , data on deaths and their causes
are b e tte r than the data in illnesses. A ccording to Freeman'** m orbidity is
classified by duration (chronic or acute), degree of im pairm ent o r sym ptom .
Im pairm ent can be m easured in terms of restricted activity days (R A D ), bed
disability days o r work days lost. Sym ptom s can be m easured in sym ptom days,
w hen th e individual exhibits certain sym ptom s. It is also im portant to rem em ber
that a person m ay show none of iJiese m easures bul m ay still be bearing a health
cost from the pollution. This is because he or she undertakes avcrtive action and
uses m edication to suppress the effects.
A s w ith m ortality, m orbidity effects can be valued in term s of individual
preferences or in term s of rc.source costs. H ence the com m ents regarding tliese
m ethods m ade earlier also apply in this case. M easures based on individual
preferences are preferable but m ore difficult to obtain. If resource cost m easures
are used, it is im portant to allow for changes in avertive behavior. O ne may
observe little o r no change in measures of health status as pollution falls: for
exam ple, if the population simply reduces its expenditures on avertive actions.
T h e main categories of expenditure that need to be exam ined are:
•
•
•
•
medical expenses arising tium the pollution
Joss o f earnings
avertive expenditure
the value of disutility arising from the assotialcd symptoms.
In principle all should be m easured, A basicslcp in the valuation is the estim ation
of a ‘health production function’. T he following exposition is based on H arrington
and Fortney, and taken from Freem an, D efine the following variables;
159
A . M iirk an d ya
s =
d =
a =
b =
c =
.
n o. o f sid e ciay.s
le v e l o f e x p o su r e lo p o llu tio n
le v e l o f a v o id a n c e or a v c r tiv e activity
lev e l o f m ed ic a l trea tm en t
le v e l o f p o llu tio n
T h e m o d e l can be g e n e r a liz e d (o (b e ca.se o f m a /iy a v o id a n c e a ctiv ities o r form s o f
tr e a tm e n t, but fo re a .se o f p r e sen ta tio n o n ly o n e o f c a c li is a ssu m e d . 'H ic fo llo w in g
reJationsnrps are p o s tu la te d .
Sick d ays arc a fu n c tio n o f cxpo.sure le v e l d and m ed ica l trea tm en t b;
■s - f(d ,b )
c x p o s u ic le v e l d is a lu n e lio ii o f jio llu tio n lev e l d and le v e l o f a v o id a n c e a
d = g ( c ,a )
S u b stitu tin g fo r d in llic first cq.uation g iv e s iJic licaJtJi p r o d u c tio n function^^
‘
s = .s(c,a ,b )
A n in d iv id u a l is a ssu m e d lo c lio o s c le v e ls o f a and b to m a x im iz e his a b ility , w h ich
is a fu n c tio n o f sick d a y s s and o th e r v a r ia b le s, jiu c h as llic a m o u n t o f n o n -sick
le is u r e lim e an d liis to ta l in c o m e .
F rom th is m a x im iz a tio n o n e can m ea su r e th e v a lu e o f r e d u c e d p o llu tio n in
term s o f th e a m o u n t o f in c o m e an in d ivid u al can Jiavc ta k en aw ay to k e e p him as
w e ll o f f as b e fo r e . If all c h o ic e s arc o p tim a l th e in d iv id u a l w ill e q u a te th e m argin al
c o sts o f r e d u c in g th e im p a c t.o f p o llu tio n by avertin g a c tiv ities o r by m e d ic a tio n
and e ith e r o f th o s e c o sts are ctpial to (he a fo resa id mcasurc^^ from c h a n g e s in
illn e s s. T h e s e c o u ld be c o m p a re d u.sing C V M te c h n iq u e s, but great carc co u ld
h a v e to b e ta k en lo cn .siirc that th e i c.sjioiulcnt se p a r a te d m e d ic a tio n an d a v c r tiv c
e x p e n d itu r e s from resid u al c h a n g e s in u tility .
In d e v e lo p in g c o u n tr ie s this 'sc c o iu l b e s t’ a lte r n a tiv e a p p ro a ch is fe a sib le and
w o rth carryin g o u t, g iv en acec.s.s to adc<iuatc d ata. In s o n ic c n scs c stim n tc s o f Ihc
r e la tio n sh ip b e tw e e n d ays lo st, m cilic:i(ion and a v c r tiv e e x p e n d itu r e s; and (he
le v e l o f p o llu tio n c o u ld b e im p o rted from 'sim ilar' c o u n tr ie s. H o w e v e r , Ihc effo rt
rjjquircd lo a c h ie v e a c c e p ta b le resu lts c o u ld b e q u ite h ig h , at least for the first few
stu d ie s for w h ich a d ata b a se w o u ld iic e il to he as.scm hletl''^
CONCLUSIONS
T h is p a p er h as d isc u sse d in s o m e tietail th e d iffe r en t m e th o d s for v a lu in g
e n v ir o n m e n ta l im p a cts in m o n e y term s. F o r ea c h te c h n iq u e it has liste d the
d iffic u ltie s as w e ll as (h e str e n g th s; in d ica tin g in w h ich a p p lica tio n s it is m o st lik e ly
to b e e ffe c tiv e an d w liat are the p r o sp e c ts o f its u se in d e v e lo p in g c o u n tr ie s. It is
c o n c lu d e d that th e r e is s o m e s c o p e for th e u se o f ea c h o f th e m arket-ba.scd
te c h n iq u e s in th e v a lu a tio n o f e n v ir o n m e n ta l b e n e fits in d e v e lo p in g c o u n tr ie s , but
th is h as y e t to b e su b sta n tia lly e x p lo ite d . P articu lar p r o m ise h o ld s fo r c o titin g e n t
v a lu a tio n m e th o d s and travel cost a p p r o a c h e s. H e d o n ic m o d e ls are b e tte r su ite d
to v a lu in g site s and se r v ic e s and for urban p o llu tio n p r o b le m s, i t is e s se n tia l to
160
Value o fth c eiiviroiuiicDt
nolc that sucJi m odels often only provide ‘orders of m agnitude’ to the size o f the
benefits, and that som e inaccuracy is iiilicrciU in the nature o f the task being
attempted. Nevertheless, tlie values obtained are useful in rcacliing rational
decisions with regard to invcstinciils involving such benefits.
It isiiot essential to be persuaded (hat the iiionciary valuations illu s tr a te d in this
section are com pletely accurate before rccommcndijig tlicir use. jEconomics is
not, and cannot be, a precise science. Its laboratory, after a ll, is human society
itself. Wiial docs matter is that (he implications o f (he valuaiion procedures
outlined here arc understood. I licse arc;
(i) By at least trying to put money values on some aspects o f environmental quality
one is underlining llie fact (hat eiiviromiicntal services are not free, ThCy do
have values in the same sense as marketed goods and services Jiave values. The
absence of markets must not be allowed to di.sguise this important fact;
(ii) By trying to value cnviromncnlal services one is forced into a rational
decision-making frame of mind. Q uite simply, tlic gains and losses, the
benefits and costs, o f actions have to be iliought about. Jf nothing else,
econom ic valuation lias made a great advance in tliat respect;
(iii) D ose-response based methods arc o f great relevance and value in developing
countries where market-based methods dcjiendciit on revealed preferences
are not feasible. In these ca.ses a careful study of the linkages between the
environmental and the polluting activity, as well as the impact of the changes
in the environment on econom ic and social activities of value is necessary.
Once this has been done, the valuation task becom es relatively
straightforward. The main difficulties that practitioners face and that they
have to be aware o f are;
■
• .th e quality o f the dosc-rcsponse rclation.ship. If it is poor, this should be
stated and a range o f estim ates provided;
• the fact that som e effects cainiol be valued. All these should be listed;
• the need to recognize lliat, as a result o f c h a n g e s in th e ciiviroiinicnt
human beings often iidju.st tlicir behavior. 'liicy do so to iniiiiinizc its
adverse effects on llicii welfare, or maximize its positive effects. Where
possible these should be allowed for, but if they arc not then (he direction
o f the bias is known and tliis should be stated;
(iv) Because o f the relative uncertainty o f the responses and the measures, it is
especially important to carry out sensitivity analysis on project appraisals
where there are significant environmental costs and benefits.
NOTES
1. Tlie seminnf p ap er on tlic hedonic m ethod i.s Ko.scti [19741. F o r a detailed survey o f its
theoretical aspects see M cConnell ct al. [1985) and V auelian [1987).
2. T h e slopes o f the bid and offer cm vcs in Figure 1 need not be as they aic show n, but the
req u irem en t that the system he an cquiJjbriiini ensures lhaf the bid curve A (3 i.s m ore
concave than the offer curve Ol-'. I his analysis is Imscd on M cC onnell ct at. [1985), but
essentially the sam e argum ent can be found in B rookshire ei al. 119821
'
3. See B artik [1985).
^
4. See V aughan (o p .cit.) (1987).
5. " ^ e s tu d y showing higher figure for the hedonic approach is B rookshire e ra / fl982] and
th e one showing the lower estim ate was B rookshire ria l. [1984]. For studies com paring
hedonic and o th er nielhods see also Sniilh cl «/. ()986J, and K c a ic y c ia l. [1988],
161
A . M i i r k a i id y a
6. A s an example o f the two stage cslimation procedure see Nelson (1978J.
7. See McConnell ct al. [1985J and Vaughan [I987J. One approach that migitt be
interesting to develop is the one where Ihc second stage estimation is carried out using
a specific utility function with the parameters estimated from the marginal hedonic
prices. This entails complex iioii-lincar estimation procedures, and the choice o f the
utility function is uncomfortably arbitrary, but tlie results can be interesting and useful
as a comparison with the marginal hedonic prices themselves. See Kaufmann and
Quigley (1987/ for one example o f .such a study on data from n sites and services project
in El Salvador.
’
8. For a detailed discu.ssioii of tlii.s point see Abclsoti and Msirkaiidyu [ 1985 j.
9. F o r m u la e fo r th e c s ljin a liu n o f Ih c tititJsfo n n a lJo ii b ia s a r c a iv c n in D u n n I1V83I a n d
M ille r 11984],
10. For a discussion o f llie metliods sec Halvorscn and Palmquist f 1980] and Blaycock and
Smallwood [1983J.
11. See for example Bishop and I Icbcrlciri (1979], or Randall ef al. (1985], I hc latter also
makes som e use of a computer as.sistcd format to describe the impacts to be evaluated,
12. For a recent survey of the coiilitigciil valuation method and the bia,scs described, see
Cummings et al.
or M ilclicll and Carson (1989]. These books identify many
more 'biases’ but the ones listed in the text arc the main ones raising m ethodological
issues.
13. See Bishop and Hcbcrlcin [1990] and MilclicU and Carson ( 1989J.
14. Sec Pommcrclinc ct al. [1982] and Coiirscy eta/. [I987J.
15. See tiic EPA study, Randall cm /. [1985].
■16. There are many studies that attest to the fact that strategic bias is not a serious problem
in practice. See, for exam ple, Schticdicr and Pommcrcliiie fI98Ij, For the use o f
incentives for Irutii-telling in contingent valuation, see Smith [1980].
17. Experiments on iterated bidding witli WTP and WTA arc analyzed in Courscy c/ al.
[1987]. Discussion o f the alternative approach may be found in Gregory J1986J.
18 . FordetailsseeM arkandyaati(JPcarcc[1989],Sm ithf/fl/. [1986] and Kealcy eta/, [1988J.
19. Fora review of the World Bank’s recent experience witli CVM sec Brisco c/a/. [1990J.
20. The theory o f (ravel cost models was initially set out by I lotcling [1949J. O ne of the first
studies using tiie mctliod was that of Clawson and Knetch [1966],
21. Studies showing the sensitivity of llic results to the value of time include Bockstael,
Strand and Haneniann [1987] and Kerry Smith and Kaoru [1990],
22. See D esvousges, Sniilh and M cGivncy (1983],
23. The most common method used lo correct truncation bias is that o f Ilcckmnnn (see
Madalla [1984]), which only involves estimating the equation with non-zero
observations. A n alternative mctluul, which has been suggested as being more
appealing for recreation behavior, is that o f Cragg [1971]. H owever, this docs require
a probit estimation o f the participation decision. See also BockstacI, cl al. (1991).
24. The rnethod was developed by Smith and Desvousges [1985] and subsequently has been
used in estimating benefits o f site improvements in the US.
25. For a dc.scriplion of the multinomial logit in its simple or nested form .see McFaddcn
[1978], For applications in tlic recreational literature see Bock,stacl, Strand and
Hanemann [1987]. N ote that in either form the household chnracteristics can only enter
the equations as interaction tcrm.s with the site characteristics.
26. For a discussion o f exact and ap|iroxiniatc welfare measures sec Willig [I976J. For a
discu.ssioii o f the is,suc in iJic context o f quality cJiangcs see Malcr [1974] Freeman
[1979] and Bock.stacl.crn/. [1991].
27. The seminal papers on welfare cslim alion with ramloiti utility models arc Small and
Rosen [1981] and Hanemann J1982J. T lie compensating income measure described in
the text refers to the welfare licncfils of a .single choice. T o gel the overall benefits, this
would have to be multiplied by the mimbcr of visits to all sites. I low cvcr, this raises the
question of how (hat number would change in response to the change in qualily and that
too has to be estimated.
‘
162
V itlu c u f tlic c iiv ir u f in ic iit
28. S e e fo rcx .'im p lc, G c rk in g a n d S tan ley [1986] fo rlic a ltli impact.'; and A d a m s, eta l. [1982]
fo r vcgct.-ition d a m a g e .
29. S ee L a n d c fild a n d S esk in , [1977] w lio claim tliat iliis ap p ro ach can be tra c k e d back as
fa r as th e / a t e 17th c e n tu ry .
,
30. T h e re le v a n t iiica.surc o f e a rn in g is an i.ssiic iti ihi.s m eth o d . S h o u ld o n e in c lu d e o r
ex clu d e tax es? S h o u ld o n e in clu d e th e d irect co n su m p tio n o f th e in d ividuals
c o n c e rn e d ? A lth o u g h th e re is no full co n sen su s, the g e n e ra l opinion seems to be that
, gross e a rn in g sh o u ld be tak en lo reflec t so c ie ty ’s in te re st in th e in d iv id u als ea rn in g , an d
I th a t ow n co n su m p tio n sh o u ld be in c lu d ed . Fina/ly th e re a re in d iv id u als w ith little o r no
e a rn in g s. W h e re th e y p e rfo rm n o n -w a g ed services (e.g. h o u sew ives) an im p u te d
e a rn in g s system can be d e riv ed .
31. T h e d isc o u n t ra te plays an im p o rta n t p a rt h ero . U sing ra te s o f a ro u n d W % (a s arc
ty p ical a t th e B a n k ) w o u ld re n d e r th e p re se n t value o f a c h ild ’s fu tu re e a rn in g very
sm all. F o r e x a m p le , a child o f tw o, w ho w ould have sta rte d e a rly at th e a g e o f 18 w ould
h av e a p re s e n t v alu e o f liis e a rn in g stre a m o f only 20% o f th at o f an 18 y e a r old.
32. S ee F re e m a n [1991]. A s long as Ilie u tility fu n c tio n is co n cav e, an d c o n su m p tio n t.s
a b o v e su b siste n c e this rc.suli will hold.
33. F o r a fu rth e r discussion o f tljc ap p lic atio n s sec lV :iicc an d M a rk a n d y a [1989].
34. F o r ail ex ain p fe o f th e use o f C V M lo m e a su re the value o f life see J o n e s L ee ct al
[1985].
35. V iscusi a n d O ’C o n n o r ] 1984] and G c rk in g , D c I hum a n d S chulze [1988).
36. S lovic, Fi.schoff an d L ichlcn.slcn [1979J.
37. F isclioff c t al. 11981],
38. O n tJic u.sc o f d a ta fro m .smoke deleelor.s .see IXinJis 11980) and froin se a tb e lts sec
U lo n u ju ist (1979).
'
39. S e c C ro p p e r & Sus.smaii (1991)] an d the cxloiisrori ol iluil m odel by F te e m a n j 199IJ. The
m o d els a re lim ite d by llic fact (hat llicy d o n o t in c o rp o ra te a utility fro m b ein g a liv e /rc r
se. L ifetim e utility in creases w ith the lifespan only b ecau se c o n su m p tio n can bo sp re a d
o v e r m o re tim e p e rio d s.
40. S ee B e rg stro m [1982], an d Jo n c s-L c c [1989J.
41. F re e m a n [1991J.
42. F o r m o re d e ta ils se e H a rrin g to n a n d F o rtn e y [1987].
43. T h is assu m es th a t tJic in d iv id u al has no n z e ro levels o f n a n d b , a n d th a t n e ith e r i.s
re s tric te d to its m ax im u m level. In technical te rm s, it assum es th e re is n o c o rn e r
s o lu tio n .
.
44. A n o th e r issu e o f im p o rta n c e is th e d istin c tio n b e tw ee n p riv a te and jiublic m ed ic atio n
a n d a v c rtiv e e x p e n d itu re s . In (be individual choice m o d el such e x p e n d itu re w ould be
ex clu d ed fro m th e p riv a te c alcu latio n d escrib ed in th e text. H e n c e (hey w o u ld n e e d to
b e a d d e d b ack in. H o w e v e r in th e a lte rn a tiv e a p p ro a c h b o th p riv a te a n d p u b lic
e x p e n d itu re s can be in c lu d e d as p a rt o f (he re sp o n se to ch an g es in p o llu tio n .
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166
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E arthscan Publications Ltd, London
a
First published 1993 by
Earthscan Publications Limited
120 Pemonvillc Road, London N i 9JN
Copyright © David Pcarcc, 1993
All riglits reserved
British Library Cataloguing-iii-I’ublication Data
A catalogue record for this book is available from the British Library
ISBN 1 85383 152 2
Typeset by DP Pliotosetting, Aylesbury, Bucks
Printed and bound by Biddles Ltd, Guildford and King’s Lynn.
Earthscan Publications Ltd is an editorially indcj'ciidcnt
subsidiary of Kogan Page Limited and publishes in association
with the International Institute for Environincni and
Development and the World Wide Fund for Nature.
C hapter 2
W hat is e c o n o m ic v a lu a tio n ?
It is im portant to understand wiiat is being done when economic
valuation is carried out. The economic value ol'something is measured
by the summation oftnany individuals’ willingness to pay for it. In turn,
this willingness to pay (W'J'J’) reflects individuals’ pre/erettces for the
good in question. So, economic valuation in the environment context is
about ‘measuring the preferences’ of people for an environmental good
or against an environmental bad. Valuation is therefore o f preferences
held by people. T he valuation process is anthropomorphic. The resulting
valuations are in money terms because o f the way in which preference
revelation is sought - ie by asking what people are willing to pay, or by
inferring their W TP through other means. Moreover, tlie use of money
as the measuring rod permits the comparison that is required between
‘environmental values’ and ‘development values’. The latter are
expressed in money terms, cither in a dollar amount or an economic rate
o f return. Using other units to measure environmental values would not
permit the comparison with development values.
The language o f economic valuation is often misleading. Studies
speak of ‘valuing the cnvironuictit’ or ‘pricing the environment’.
Similarly, changes in the environment affect health so it is necessary to
find some valuations of changes in health status, the ultimate change, of
course, being the cessation of life itself. It is commonplace to find
references to ‘the value of life’. Economists arc apt to speak of ‘the
environment as commodity’ wliich leaves them open - perhaps
justifiably - to charges that this is all the environment is worth. All these
terminologies generate an uiifoiTunatc image as to what the activity of
economic valuation involves. What is being valued is not ‘the
environment’ or ‘life’, but people’s preferences for changes in the state
of their environment, and tlicir preferences for changes in the level of risk to their lives. There is no dispute that people have preferences for
and against environmental change. There is no dispute that people are
willing to pay to prevent or sccuic change: donations to conservation
14 ■ Economic values and the natural world
societies alone deinonstraic this. The prol>lcin arises when tliis W TP is
taken as ‘the’ value of the ciivironnicntal change.
Many people believe that there arc inirinsic values in environmental
assets. They are of value in themselves and are not ‘o f human beings,
values that exist not just because ihdividuai human beings have
preferences for them. There is no reason lo reject the idea of intrinsic
\jalues because the idea of measuring preferences is adopted. W hat is
being assessed are two different tilings: the value of preferences of
people for or against ciivironnicntal change (economic values) and the
value that intrinsically resides ‘in’ environmental assets (intrinsic
values). Economic valuation is essentially Libout discovering the demand
curve for environmental goods and services; the values which human
beings place on the environment. The use of money as the measuring
rod is a convenience; it hapjiciis to be one of the limited num ber of ways
ill which people express preferences, ie through their willingness to pay.
It risks the equation of money as measuring rod with money as
Mammon, and since one ‘cannot serve God and Mammon’ the
temptation is to think that one cannot serve money and the environment
either. This kind of picture thinking is unfortunate, but understand­
able. Economists have been lax in thinking how their language is
comprcJicndcd by others. And some non-economists have not, to be
fair, made very great efforts to understand what economists do.
Once it is accepted that both forms of value exist, tlie issue becomes
one of which values should inform and guide the process of making
public choices. The answer Is that since both values arc ‘legitimate',
both are relevant to decisioii-rnaking. Making decisions on the basis of
economic values alone neither describes real world decision-making,
nor would it be appropriate given that governments and the other
agents involved in the development process have multiple goals. But
one differciicc between the economic and intrinsic value approach is
that economic values can, in principle, be measured. Intrinsic values
cannot. If dccision-makcrs do not feel the need for quantified
assessments of gains and losses, then lack of quantification may not be
an obstacle to decision-making. Otherwise it will often prove difficult to
make choices between competing projects or alternative policies with
differing environmental impacts.
The practical problem with economic valuation is one of deriving
credible estimates of that value in coniexis where there arc either no
apparent markets or very imperfect markets. If it is possible to derive
such values, then it may well be that some measures of individuals’
IV/iat is economic valualion? ■ 15
preferences will, in any event, capture at least part of what might be
called intrinsic value. This will be so if the people expressing values for
the environmental change in question themselves possess some concept
of the intrinsic value of things. I’hcy may then be partly valuing ‘on
b d ia ir of the environment as an entity in itself.
Once again, the discussion may seem remote from the concerns of the
development process. But it can be very important to those concerns.
M any of the environmental assets that people generally feel are very
important arc in the developing world. Notable examples include the
tropical rain forests, ecologically precious wetlands, and many of the
world’s endangered species. Many people fed these environmental
assets have intrinsic value. They may express lliat view by speaking of
the immorality of activities whicli degrade these resources, and of the
‘rights’ to existence of trees and animal species. Such discussions arc
important, but at the practical level the ‘development and environment’
debate is frequently about tltc very higti value placed on development
in a context of inalnourishmcnt and underemployment. The environ­
ment will often be viewed as a lu.xury to be afforded later, not now while
the struggle for development is under way. Bringing discussion of
rights and intrinsic values into the policy dialogue can be counterpro­
ductive in such contexts: honouring them is perceived as forgoing the
benefits of development. If, on the other liand, conservation and the
sustainable use of resources can be shown to be of economic value, then
the dialogue of developer and conservationist may be viewed differ­
ently, not as one of necessary opposites, but of potential complements.
The remaining stage rests on finding ways for the developing world to
capture the conservation benefits. I f environmciilalists in rich countries
perceive value in conserving a rain forest in a poor country, this is of
little consequence to the poor country unless llicre is a potential cash
flow or technology transfer to be obtained, Economic valuation is
therefore a two-part process in which it is necessary to;
1 demonstrate and measure the economic value of environmental
assets - what we will call tlie demonstration process} and
2 find ways to capture the value - the appropriation process.
TOTAL ECONOMIC VALUE
The economic value of environmental assets can be broken down into
a set of component parts. This can be illustrated in the context o f
decisions about alternative land uses for a tropical forest. According to
16 ■ Economic values and the natural world
a bcncfit-cost rule, decisions lo 'develop' a iiopical forest would have to
be justified by showing that the net benefits from development exceed
the net benefits from ‘conservation’. Development here is taken to
mean some use of the forest that would be inconsistent wiili retention
of the forest in at least approximately its natural state. Conservation
could have two dimensions: preservation, which would be formally
equivalent to outright non-usc of the resource, and conservation which
would involve limited uses of the forest consistent with retention of
natural forest. The definitions arc necessarily imprecise. Some people
would argue, for example, that ‘ecotourisin’ is not consistent with
sustainable conservation, others that it may be. Accepting the lack of
precise lines of differentiation, the bencfit-cosl rule would be to develop
only if the development benefits minus llic development costs are
greater than the benefits of conservation minus the costs of conserva­
tion. Put another way, the development benefits minus both the
development costs and the net conservation benefits mu.st be positive.
Typically, development benefits and costs can be fairly readily
calculated because there arc attendant cash Hows. Timber production,
for example, tends to be for commercial inai kets and market prices arc
observable. Conservation benefits, on the other hand, arc a mix of
associated cash flows and ‘non-market’ bcncliis. Tiiis fact imparts two
biases. The first is that the cotnponents with associated cash flows are
made to appear more ‘real’ than those without such cash flows. There
is ‘misplaced concreteness’; decisions arc likely to be biased in favour of
the development option because conservation benefits arc nor readily
calculable. The second bias lollows from llie first. Unless incentives arc
devised whereby the non-market benefits arc ‘internalised’ into the land
use choice mechanism, conservation benefits will automatically be
downgraded. Those who stand to gain from, say, timber extraction or
agricultural clearance cannot consume the non-markcted benefits. This
‘asymmetry of values’ imparts a considciablc bias in favour of the
development option.
Conservation benefits arc measured by the total economic value of the
tropical forest. Total economic value (TEV) for a tropical forest is
explained in the following box.
TEV comprises use and non-use values. Conservation is consistent
with some sustainable uses of the forest, including sustainable timber
harvesting. Direct use values arc fairly straightforward in concept but
arc not necessarily easy to measure in economic terms. Thus the output
of minor forest products (nuts, rattan, latex etc) should be measurable
What is economic valuaiion? ■ 17
T O T A L E C O N O M IC V A LU E TN T H E T R O P IC A L
FO REST C O N T E X T
Total Economic Value =
Use value
-•
( I)
( 2)
(3)
Direct value
Indirect value
Option value
Non-use value
(t)
+ Existence value
Sustainable
timber
Non-timber
products
Nutrient cycling
Recreation
Watershed
protection
Medicine
A ir pollution
reduction
Plant genetics
Micro-climate
Future uses as
p e r ( l ) + (2 )
Education
Forests as objects o f
inirinsic value, as
a gift to others, as
responsibility
(stewardship)
Includes cultural
and heritage values
Human habitat
Total econom ic value com prises use and existence values. The use value
category com prises direct uses (eg lim ber production), indirect uses (eg the
protective effects of forests on walersheds), and 'option' values - akin to an
insurance payment to reflect the v,tlue of a future use if the option to use the
resource is exercised. Existence values com prise willingness to pay for an
environmental asset's conservation even though no use value is present.
Economic values and tropical forest functions:
the Korup National Park
K o ru p National Park lies In Southwest Province, Cam eroun. It contains
Africa’s oldest rainforest, o ver 60 million years old. with high species
endemism. T h e re are o ver 1000 species o f plants, and 1300 animal species
including 119 mamma/s and 15 primates, O u t o f the total listed species. 60
o ccu r nowhere else and 170 are currently listed as endangered. Continued
land-use changes are putting substantial pressure on the rainforest. The
W o r ld w id e Fund for N ature ( W W F ) initiated a programm e of conserva­
tion, centred on a management area o f 126,000 hectares plus a surrounding
buffer zone of 300.000 hectares. A similar programme was initiated for Oban
National Park just across the border in Nigeria.
Econom ic valuation of the rainforest's benefits was carried out in o rd e r to
assist with the process of raising development aid funds to conserve the area.
18 ' Economic values and the natural world
Benefits of conservation w e re then com pared to the co sts o f the
conservation p ro ject plus the forgone lim b er revenues. W h ile the fram e­
w o rk foranalys/s was the tota/econom ic value concept, existence and option
values w e re not directly estimated. T h e p ro ced u re involved eslirnating direct
and indirect use values to the C am eroun and then seeing what the existence
and option value would have lo be in o rd e r to justify the project. Since it was
thought that the non-use values w ould mainly reside w ith people outside the
C am ero u n , the focus of attention for non-use values was on seeing what
international transfers migiit be needed. Brielly sum marised, the results w ere
as show n be/ow.
Bcnc/its and costs to Uk C.onicroun
(Present values, million CPA, 1989 prjces)
(Discount rate = W li)
C o ils o f conservalion project:
Resource costs:
Forgone forest benefits:
timber
forest products
-W j
- 35 i­
- 223
-5051
Bene/its o f conservation project:
Direct use benefits
Use of forest products
Tourism
+ 354
+ 600
Indirect use benefits
Protection o f fisheries
Flood control
Soil productivity
+ 1770
+ 265
+ 130
+ 3199
Net benefits to Cameroun
- 105?
Economic rale of return
6.2%
Net benefits to Cameroun
if the discount rate is 6%
+ 319
Fro m the standpoint, o f the C arhero u n . tlie p ro ject appears not be
w orth w h ile because th ere is a negative net present value o f som e C F A 1852
million at 8% discount rate, aithough there is a m odest positive net present
value if the discount rate is low ered to 6% . But the analysis co vers only som e
of the com ponents of total eco n o m ic value. W h a t of existence and option
What is economic valuation? ■ 19
values? These w ere not e slim alr.l directly. Instead, the issue therefore
becomes one o f asking w hether tfte rest o f the w orld would be willing to pay
C F A 1852 million (in present value lerm s) to the Cam eroun to rellect these
option and existence values. O ne way of testing this is to look at existing
conservation transfers through d e l’i for-nature swajis. Translated into a per
hectare basis, the required transfer lo r the Cam eroun is just over 1000 E C U
km ? Debt-for-nature swaps have implied various valuations ranging from as
low as 15 E C U knd (Bolivia) to aomnd 1600 E C U kin^ (Costa Rica). Given
the high species endemism and divi-i srty of Korup, values of 1000 EC U s o r
m ore w ould secni justified. The ^onservation o f Korup forest becomes
justified in economic terms provided this transfer actually takes place.
The resource costs are based on liudgets and plans in the Korup National
Park Master Plan, net o f compensation payments (which are internal
transfers) and other costs rcgaided as being not attributable to the
consen/alion pro|ect. The forgom.' forest benefits include timber from
potential commercial logging (the 353 million C F A ) and some forgone
traditional uses o f the forest, mainly hunting, that would be forbidden within
a designated national park, and wlm h cannot be offset by diverting activity
elsewhere (the 223 million C F A ). 1 bis proscription of traclliional uses affects
some 000 villagers within the national park boundaries. In the long run,
however, other residents, mainly Some 12,000 people on the periphery will
be able to continue their traditional use o f the forest, which they would not
be able to do if deforestation continued. Thus, while one group loses,
another, larger group gains (the 334 million C F A ), The tourism figure is
conjectural and is based on an evenii.ial 1000 visitors pa by the year 2000 and
their expected expenditure adjusted for the shadov./ wage rate.
'
The fisheries item is important. Rainfall in the forest feeds several rivers
which feed into large mangrove areas rich in fish. The mangroves prosper on
the basis o f freshwater inundation in high w ater periods and saltwater in low
w ater periods. If the forest was to disappear, peak flows from the forest
would increase and there would be .idded sediment and less salinity. Basically,
the mangrove swamps would no longer function as the habitat for the rich fish
species that make up both the onsliore and offshore fisheries. Since the link
between the rainforest and the offshore fishery is less established than the link
to the onshore fishery, only damage to the onshore fishery was estimated.
This was valued at the m arket value of fish and. as a check, at the income
derived from the fishery.
■
The flood alleviation benefits were calculated by looking at the expected
value o f the income losses that would accrue if there was a flood. The so/f
fertility benefits w ere based on a hi oad brush assessment that, if the forest
disappeared, cash crop yields would decline by 10%.
The implicit minimum requirenn'nt for an international transfer (the socalled 'rainforest supply price') was L-stimated by taking the present value of
2 0 ■ Economic values and the natural world
net costs (the 1052 million CPA) and dividinf; by the present vaiue of the
hectarage that could be identified as being protected by the consen/ation
project - some 500,000'hectare years'. This produces the value of 3600CFA
per hectare per year, or some 1060 £CU/km^,
Notable omissions from the study are twofold: no atlerhpt w,as made lo
assess the value of the forest to local people over and above its use value: and
no attempt was made lo estimate the net contribution to C O ; emissions
I from deforestation. Both omissions are likely to reduce the net present value
deficit shown in the.table. But only the former will lower the rainforest supply
price because CO^ benefits are likely to attract a negligible if not zero
willingness to pay on Che part of Cameroun citizens. The C O j benelits will,
however, make it more likely that the rest of the world will pay for rainforest
conservation (ie it affects the rainforest demand price),
Source: Ruilenbeek, J (1992) 'The Rainforest Supply Price: a Tool for Evaluating
Rainforest Conservation Expenditures' Ecological Economics, vol 6, no I, July, pp
57-78: Ruilenbeek, J ( 1990) 'Evaluating Economic Policies for Promoting Rainforest
Conservation in Developing Countries' PhD thesis. London School of Economics;
Ruilenbeek, J (1990) Economic Analysis of Tcopicul Forest Conservation Initiatives:
Examples front West Africa, W o rid W id e Fund for N.tlure, Godalming
from m arket and survey data, but the vaJuc of medicinal plants for the
world at large is more difficult to measure.
Indirect use values correspond to the ecologist’s concept o f ‘ecological
functions’. A tropical forest m ight help protect watersheds, for
example, so that removing forest cover may result in water pollution
and siltation, depending on the alternative use to which the forest land
is put. Similarly, tropical forests ‘store’ carbon dioxide. W hen they are
burned for clearance, m uch of the stored CO^ is released into the
atmosphere, contributing to greenhouse gas atmospheric warming.
Tropical forests also include many species which in turn may have
ecological functions - one of values o f biological diversity.
Option values relate to the amount that individuals would be willing
to pay to conserve a tropical forest for future use. T hat is, no use is made
o f it now but use may be made of it in the future. Option value is thus
like an insurance prem ium to ensure the supply of something the
availability of which would otlierwise be uticcrtain. While there can be
no presum ption that option value is positive it is likely to be so in the
context where the resource is in demand for its environmental qualities
and its supply is threatened by deforestation.
What is economic valuation? ■ 21
Existence value relates to valuations of the environmental asset
unrelated to either current or optional use. Its intuitive basis is easy to
understand because a great many people reveal tlieir willingness to pay
for the existence o f environmental assets through wildlife and other
environmental charities but without taking part in the direct use o f the
wildlife through recreation. To some extent, this willingness to pay may
represent ‘vicarious’ consumption, ie consumption of wildlife videos
and T V programmes, but studies suggest that this is a weak explanation
for existence value. Empirical measures of existence value, obtained
through questionnaire approaches (the contingent valuation method),
suggest tliat existence value can be a substantial component o f totd
economic value. This finding is even more pronounced where the asset
is unique (see following box) suggesting high potential existence values
for tropical forests and especially for luxuriant moist forests. Some
analysts like to add bequest value as a separate category o f economic
value. Others regard it as part of existence value. In empirical terms it
would be hard to differentiate tlicni.
V A L U IN G P R E F E R E N C E S F O R U N IQ U E A S S E T S :
V IS IB IL IT Y A N D T H E G R A N D C A N Y O N
Calculating existence value is likely to be important in contexts where (a)
many pebple are familiar with the attributes o f the asset to be valued, and (b)
the asset is unique. Some evidence to support this view can be found in an
analysis o f valuations for improved visibility in the Grand Canyon region. By
using surveys to assess both users' .md non-users' willingness to pay ( W T P )
for im proved visibility, one study found that user values w ere some 7 US
cents p er month, whilst existence values w ere $4.43 per month (1980
prices), over 60 lim es higher. Significantly, distance from the site did not affect
preservation values, a fact that the researchers put down to the unique
nature o f the G rand Cany on, a 'worn Icr o f the world'. Since distance was not
relevant to the preservation bids, it is legitimate to extrapolate the mean
preservation bids lo the nation as a whole. The ratio of 60+ is much higher
than other studies have found between total values and use values. But it
arises partly from the uniqueness of the asset and partly because two different
questions are being asked. The user value question asked how much users
would be willing to pay through enironce charge increases, whereas the total
value question related to monthly electricity bill increases.
Respondents w ere shown photographs of the Grand Canyon region with
each photograph revealing different degrees of visibility. Perceptions of
22 • Economic values and (he natural world
visibility could o f course differ from some scientific measure, so tests were
carried out which suggested a linear relationsfiip between perceived visibility
(on a scale of 1 to 10) and apparent target contrast measured by a mulliwave
telradiometer. Respondents were asked one of two questions: how much
would they be willing to pay for improved visibility, with the 'vehicle' o f
payment being hypothetical additions to the existing entrance fee? and how
much would they be willing to pay to preserve visibility if the vehicle was
increases in the monthly electricity bi(l?'The first group should therefore
provide user values. The second group would provide a 'total preservation
bid', ie user plus existence values. If existence values 'exist' then the latter
valuations should be greater than the former. This was the finding. By showing
how bids w ere related to income, age, and distance from the Grand Canyon,
the W T P estimates could be extended to the nation as a whole and
compared lo the costs o f controlling air pollution. The annualised preserva­
tion benefits for the nation ,is a whole came lo $7,4 billion ( 1980 dollars) and
the costs o f control came to $ 2 .8 -3 .1 billion in annualised form. Hence the
costs o f control w ere outweighed by the benefits o f control by a factor of
about 3 ..
S ch ulze. W e t a l{ 19 8 3 ) 'T h e E c o n o m ic Benefits of P re se rv in g V isib ility in the N a tio n a l
P arklan d s' N a tu fa l R eso u rce s Journo!, vo l 2 3 . Ja n o .iiy; and B ro o k sh ire , D , S ch u lze, W
and T h a y e r, M ( ( 9 0 5 ) "Some U n usual A sp ects o f V.niuing a U n iq u e N a tu ra l R e s o u rc e ’
D e p a rtm e n t o f E co n o m ics, U n iv e rsity o f W y o m in g , Fe b ru a ry (m/meo)
Total economic value can be expressed as;
TEV = Direct use value + Indirect use value + Option value
+ Existence value
While the components o f TEV are additive, care has to be taken in
'practice not to add competing values. T'liere are trade-offs between
different types of use value and between direct and indirect use values.
The value o f timber from clear felling canimt be added to the value of
minor forest products, but timber from selective cutting will generally
be additive lo forest products.
IS TOTAL ECONOMIC VALUE REALLY TOTAL?
It is tempting to think that economists have captured all there is to
know about economic value in the concept of TEV. But have they?
First, recall that they are not claiming to have captured all values,
merely economic values. Second, it is not just environmentalists with
W hat is economic valuauunr - x.j
their concerns for the ‘rights' of Nature who fcci uneasy about the
economist’s approach, but ecological scientists as well. Many ecologists
share a philosophical or religious concern with ‘stcwardsliip’ or a
respect for the ‘living’ planet earth - Gaia. But many ecologists are also
trying to say that total economic value Is still not the whole economic
story. There are some basic functions of ecological systems which
underlie the ecological functions that wc have been discussing
(watcrsljcd protection etc). T u ; ;icr and Jones (1991) call them ‘primary
values’. They are essentially the system characteristics upon which all
ecological functions arc contitigcnt. There cannot be a watershed
protection function but for the underlying value of the system as a
whole. There is, in some sense, a ‘glue’ that holds everything together
and that glue has economic value. I f this is true, and it is difficult to
pinpoint what is at issue here, then there is a total value to an ecosystem
or ecological process which exceeds the sum of the values of the
individual functions. Total economic value may not, after all, be total.
WHY DERIVE ECONOMIC VALUES?
There arc at least five major reasons why economic valuation of
environmental goods and services is important.
The en viro n m en t in n a iivn a l d evelo p m en t stra te g ie s
Environmental damage shows up in two ways as a cost to nations. First,
it produces impacts on G NP; G N P is less than it otherwise would be if
at least some environmental damage is avoided. Second, it generates
costs which arc not currently recorded as part of G N P, but which
Would be if G N P accounts were modified to reflect comprehensive
measures of aggregate well-being rather than economic activity.
Focusing on the first aspect, some evidence is now available to show
that environmental degradation results in appreciable losses of GNP,
The kinds of impacts that give rise to such costs include;
•
•
•
•
forgone crop output due to soil erosion and air pollution;
forgone forestry output due to air pollution damage, soil
contamination and soil erosion;
impairment of human health with consequent lost labour
productivity; and
'
diversion of resources from high productivity uses to uses such as
maintenance of buildings tiamagcd by pollution.
Brazil
24
0.017
--\!
values and M lfS tu ra l world
T h ? v 9 0 > e k jw fi rijiSP frtf
iftf.
0010
PS
' ts
mq^inlKitvcrf^dh^igftia ClKeffiyaBaif illesfcja0jj(pcsfjj(asw©r¥&«(f|ji^pg«vljpeiwumcjH(l^Wiy*y p ftjd d c tte ’cattaplimsni^fg b*tSMBOiSfeJ0lE:rtw elSPtMt fi<?ipftdMch
A’illingttoasito^igtiCJgJobdsdJro-iftqtLiall acjitfinUltpflidib^tll#4dilftpr9tiiBg>rc'
tratghaftBsvUkrdugbdtiiiateaTarhbfAlQk^pivHJpadigb itiiilrkie&
Atsean
exam ple o f the form er, the im pact o f global w arm ing on world
agriculture is und er continuing investigation (see box).
V A L U IN G T H E E F F E C T S O F D O U B L IN G C A R B O N
D IO X ID E L E V E L S O N W O R L D A G R IC U L T U R E
Economic models are being developed which attempt to measure the likely
impacts of global warming on the wor/d economy. One study shows the
effects of doubling CO^ concentrations on world agriculture, using a partial
equilibrium world food model which measures changes in consumers' and
producers’ surpluses. Provisional results are shown below.
T ab le ( The effects o f ghbal warming on fooil consumers and producers
Country/region
Welfare change
(tm 1986)
USA
Canada
EEC
N Eurgpe
Japan
Australia
China
USSR
Brazil
U94
-167
-673
-51
-i709
+66
+2B82
+650
-47
World total
+1509
■
As % of GDP
0,005
0.047 .
0027.
0,010
0.062
0,033
O.MI
0.292
0.017
0,010
Two results are of interest. First, the impacts are generally very small when
expressed as a percentage of national income. Second, some areas gain from
global warming due to the effects of the warmer climate on crop growth and
suitability of land. The differences arise because of different climatic impacts
in different regions: global warming will not resuil in the same temperature
increases throughout the world. And precipitation will also citange. The
■
What is economic valuation?
•
xj
notable gainers aie China and the USSR. The overall impact on the world is
very small at around 0,01% of w orld G D P.
Analyses o f this kind assist in identifying the interests that each country
would have in a global warming agreement. Those who gain are not likely to
show much interest in signing an agreement, whereas those who lose might.
O n the other hand, the study assumes no 'discontinuity in the relationship
between warming and damage done. Sudden catastrophes and other
ecological shocks and stresses arc not allowed for. These might not be
correlated with the 'losing' nations shown above, ic some o f the expected
gains may be offset by major weather events, while some of the losses might
be even bigger.
Source: Resources and Technology Division, Economic Research Service. US
Department of Agriculture (1990) C/«iiale Cfionge.- Econoiitic Implications for World
Agricukure, Washington DC. November (draft)
Simpler approuclics based on crop responses to soil erosion and
pollution liave their uses too. Soil erosion is endemic lo many
developing countries. Soil erodes 'naturally' but lack of investment in
conservation, poor extension .services, inability to raise credit and
insecure land tenure all contribute to poor management o f soils. A
standard approacli to estimating ii>c costs o f soil erosion is to estimate
soil loss through the Universal Soil Loss Equation (USLE). The
U SLE estimates soil loss by relating it to rainfall crosivity, R; the
‘erodibility’ of soils, K ; tlic slope of land, SL) a ‘crop factor’, C, which
measures the ratio of soil loss under a given crop to that from bare soil,
and conservation practice, I’, (so that ‘no conservation’ is measured as
unity). The U SLE is then:
Soil Loss = K X K X SL X C X P
The next step is lo link soil loss lu crop productivity. In a study o f soil
loss effects in southern Mali, rcscarclicrs applied the following equation
to estimate the impact.
.
Yield = C-b*
where C is the yield on newly cleared and hcncc uneroded land, b is a
coefficient varying with crop and slope and x is cumulative soil loss.
Finally, the resulting yield reductions need to be valued. A crude
approach is simply to multiply the estimated crop loss by its market
price if it is a cash crop. But the impact of yield changes on farm
26
‘
Economic values and the natural world
T H E C O S T S O F S O I L E R O S IO N IN M A LI
The costs of soil erosion in Mali are shown i/sing both the dose-response
approach and the nutrient replacement approach. Because soil loss in any
one year has effects in subsequent years, the data show both an annual loss
and a present value loss expressed as a loss in a single year. Three conclusions
emerge.
1
2
Econom ic losses from soil erosion are high enough to warrant
conservation investments in some areas in the south of the country.
Investing in additional agricultural output may be less profitable than a
simple financial appraisal would suggest. It is necessary to build into the
analysis some estimate of expected soil erosion, and this wili low er rates
of return.
.3
Most importantly, it
is necessary to ask why soil erosion occurs.
Restrictions on access to informal credit and insecure land tenure are
■ important factors. High risks also contribute to high farmer discount
rates: measures can be taken to reduce i isks.
The nutrient replacement approach, which values the soil loss at the cost of
replacing the nutrients, shows higher values than the crop-response estimate
{$7.4 million pa com pared to $4.6 million pa).
.
T ab le 2 Form incm>e losses in Akili due lo soil erosion { 1988)
(Loss based on U SLE
and farm budgets)
As % G D P
As % agricultural
GDP
4.6
0.2
0.6
Discounted present
value of income loss
31.0
1.5
4.0
National annual
loss based on
nutrient replacement
74
0.4
1,0
National annual
income losses
US$ million
'
.Source: Bishop, J and Allen. J (1989) The On-Sue Cosls o f Soil Erosion in M ali
Environment Department Working Paper No 21, W orld Bank. Washington D C ,
November
IV/iat is economic valuation? • 2 7
incomes will generally be more eomplcx lhan this. For example, yield
reductions wouJtl reduce the requirement for weeding and harvesting.
The Mali study allowed for these effects by looking at the total impact
on farm budgets with and without erosion (sec box).
The procedure described is an example of a ‘dose-responsc’
approach to valuation. The ‘dose’ is soil erosion, the ‘response’ is crop
loss. Another approach would be to look at the costs of replacing the
nutrients that arc lost with soil ci osion. Nutrient losses can be replaced
with chemical fertilisers which liavc explicit market values.
Wlicrc it is not {possible to cng.igc iti detailed assessment of the costs
of resource degradation it is still useful to obtain ‘best guess’
calculations. In Burkina Faso csiimatcs were made of the total amount
of biomass lost each year in the form of fuclwood and vegetation. The
resulting losses show up as forgone household energy (fuclwood) which
can be valued at market prices for fuclwoorl; forgone millet and
sorglium crops wliich can be valued at market prices; and reduced
livestock yield due to fodder losses. Fuclwood losses amount to some
C FA F 47 billion, livestock a furllier CFA F JO billion, and cereal losses
a furdicr CFA F 15 billion. Tlic grand total amounts to some 9% of
Burkina Faso’s G N P. It cannot be deduced from this that Burkina
Faso’s G N P is 9% less than it otherwise would be. This is because
resources would have to be expended in order to rehabilitate eroded
areas and to prevent further damage. But if the resources required are
small, then the 9% figure is a ballpark estimate of the direct loss to
Burkina Faso.
Provided they are credible, national environmental damage cost
estimates can play a useful role in assessing development priorities.
Because environmental damage costs do not show up explicitly in
measures of national product, planners have no obvious incentive to
treat environmental damage as a priority in development plans.
Increasingly, however, cnviroiinicnt is entering into development plans
as the G N P costs of degradation arc being shown to be significant and
sometimes very substantial (see l ollowing box). Arguments of this kind
are particularly appropriate at the level of macroeconomic management
of the economy: it may be more important tliat the Ministry of Finance
appreciates the costs of environmental degradation than that the
Ministry of the Environment docs.
The idea that economics ‘lose’ G N P because of environmental
degradation is not straightforward. Some economists would argue
along the following lines. All countries have ‘developed’ through
Oo
ESTIMATES OF NATIONAL ENVIRONMENTAL DAMAGE
T a b le 3 The effects o f giobal worm/ng on focd consumers and producers
§
Composition of 6iM
Air
poHuiion
Country
Brazil
Burkina Faso
Costa Rica
Czechoslovakia
Ethiopia
Finland
Germany (pre-unif.)
Hunga-y
Inaonesia
Japan
Madagascar
Malawi
M ali’
Mexico
Netherlands
Nigeria
Papua New Guinea
Philippines
Poland
USA
Zimbabwe
9.3
Water
pollution
iS.j
14
15.4
4.0
6.0
110
0.8
17.4
8.7
5.7
6.9
0.1
aa
a3
7.0
9.0
1.6
4.4
CO
^ • -J
Deforestation
Coastal
fisheries
0.2
Soil
erosion
Change stocks
of gas. oil,
minerals etc
&
1.0
cti
3.1
1.2
9.0
1.6
3.3
50
-
0.1
114
0.9
1.0
5.i
0.5
11.7
3.0
0.5
0.5
1.0
0.2
10.2
5.0
16
13
4.0
6.0
1.0
1.0
1.4
•
10
0.1
12
3.4
7.0
4.0
15
3.6
4.8
Others
1.5
3.1
0.9
l.O
0.5
3.9
I
IVhat is economic valuation? ■ 29
Table 3 shows eslimates of the money value of environmental damage, or
natural asset depreciation, in selected countries and according to the type of
damage. Estimates are expressed as percentages of conventional GNP.
While the estimates use differeni techniques, relate to different years and
vary in the quality of the underlying research, they suggest some broad
interpretations. In the developed world total gross environmental damage
may be around 2-4% of GNP; in the East European countries perhaps
5-10% of GNP; and in the poor developing nations perhaps 10% and above.
This does not mean it is worth avoiding all this damage. Conservation costs
resources as well. But since many conservation measures involve the removal
of economic distortions (such as price controls, subsidies, undefined
resource rights) the costs of conscivation will, in many cases, be low.
Source: Pearce, D W and Atkinson, G ( 1992) Are Nalioiw/ Economies Susloinohlel
Measuring Sustainol/lc Oeire/opmenc C c n li c tor Social and Econom ic Research on the
Global Environm ent. Universitj' College London
processes w hich have as th eir iiickicntal effect the loss o f environm ental
quality and environm ental assets. T h e U nited K ingdom , for exam ple,
experienced horren d o us air and w ater pollution d u ring the industrial
revolution. A rguably, the jxjor environm ental quality was a price that
had to be paid in o rd er to secure iliat econom ic developm ent. Indeed,
it m ay even be th e case th at the loss o f environm ental assets is w hat
triggers the developm ent process, or p a rt o f it. G reat Britain deforested
m uch o f its land because o f the dem and for fuclwood, the pressure to
convert land to otlicr uses, and the industrial dem and for wood. T h is in
tu rn helped force the search for other energy sources such as coal and,
eventually, coke m ade from coal. T hese energy sources were the basis
o f th e industrial revolution.
I f this story is credible, it may be th a t the 5, 10 or even 20% losses o f
G N P being cstim alcd by econom ic valuation procedures are illusory.
T h e rest o f the G N P is a c t u a l l y t h a n it would have been had these
environm ental assets not been degraded. T his is an appealing view for
those w ho find cnvironm cnlalisis’ concerns rather irritating and
unw orldly (and this group includes quite a few econom ists). B ut it is
deeply flawed.
F irst, it is n o t even correct as a reflection on history. Som e societies
have actually disappeared because they ran out o f accessible natural
resources. H ad natural resource scarcity been the sp u r to developm ent
at all tim es, this would not be true. W hile the R om ans sought .
30 ■ Economic values and the natural world
'
expanding colonies partly to secure their wood supplies, the great
civilisation of Knossos declined because of tbcir absence. The reality is
that there has to be some other resource for people to turn to if one
resource runs out. For Mali, Ethiopia and Burkina Faso, for example,
no other resource is obvious.
Second, for tlie somewliat Pangiossian view tliat ‘environmental
degradation is good in the long term ’ to iiold, wc have to be assured that
the degradation is necessary. Tliat is, citlicr development would not
take place without the tlcgradation, or at least tlic benefits of
degradation are less tiian tlic costs. Advocates of the long benefits of
degradation do not offer evidence on costs and benefits but they are
frequently the same people who argue that the prime cause of
degradation is economic distortions in the form of subsidies to
agricultural inputs, or controls on agricultural output prices. But the
two views cannot be lield simultaneously. If economic distortions are
, tlie main cause of environmental degradation, tlien not otily is it socially
beneficial to remove the distortions (otherwise they would not be called
distortions in the first place), but it is cnvironmentalJy beneficial as
well. Environmental degradation becomes the result of misguided
economic policies, iiot a necessary part of some economic evolutionary
process by which development is achieved.
Those who argue that environmental degradation is a cycle in a long­
term trend towards ‘development’ really liavc very little to substantiate
their view. They would have at least a credible argument if the proceeds
of natural resource degradation were invested in other forms of capital
of a more productive nature. But the world is full of countries that have
consumed the proceeds of resource depreciation as the science of
‘green national accounting’ is increasingly showing (sec below). Nor is
'the process of environmental capital consumption confined to poor
countries. Oil-rich states like the Netherlands and the United Kingdom
have also been guilty.
M odifyin g the n ation al accounts
.
Macroeconomic management makes extensive use of the national
economic accounts which record monetary flows and transactions within
the economy. The primary purpose of tlic accounts is to record
economic activity, not to measure aggregate well-being in the nation.
None the less, national accounts are widely used to indicate well-being,
and rates of change in national aggregates such as G N P are widely
What IS ccononiic valuation? ■ 31
construed as measures of ‘development’. W liether the accounts are
designed to record economic aciivicy or measure well-being, or both,
they are deficient in respect of their treatm ent of environment.
Economic activity involves the use of materials and energy, and, once
transform ed into products, those same resources become, sooner or
later, waste products. Any measure o f economic activity which ignores
these materials and energy flows will fail to record im portant activities
which aficct the sustainability of the economic activity. In the same way,
any measure o f well-being whicli ignores the resource and energy flows
will fail to measure sustainable well-being. For tlicsc reasons, there is no
widespread consensus that the national accounts need to be modified at
least with respect to the way in which environmental ‘stocks’ and ‘flows’
are recorded.
M aterial and energy flows begin at the point of extraction, harvest or
use o f natural resources. Tlicy end by being waste products, ie
emissions to am bient cnviromiicnts, discharges to water, and solid
waste to land or sea. Logically, then, G N P needs to be modified to
account for:
•
•
any depreciation of natural capital stocks, in tlie same way that net
national income is equal to gross national income less estimated
depreciation on m an-m ade capital. T his is a measure of the ‘draw
dow n’ o f natural capital;
any damage losses accruing to hum an wellbeing from the
extraction, processing and disposal o f materials and energy to
receiving environments.
Both adjustm ents involve ecotwinic valuation. Indeed, it is somewhat
ironic that m any of the critics of economic valuation arc also advocates
of measures of ‘green G N l” , seemingly unaware that wc cannot
com pute green G N P without economic valuation o f environmental
change! The first adjustm ent involves a valuation o f the natural capital
stock, the second involves valuation o f such tilings as health im pair­
m ent, pollution damage to buildings, crops and trees, aesthetic and
recreational losses and other Ibrms o f ‘psychic’ damage. National
accountants arc not agreed on how best to make the appropriate
adjustments. At the very least one form o f adjustm ent to gross measures
of national income would be;
M odified G N P = Conventional G N P + Value o f environmental
services - Value o f environmental damage.
. 3 2 ■ Economic values and ihc natural world
In tiiis way, additions to, say, national parks or improvements in
pollution levels would be reflected in jiositive entries for modified
G N P , and damage done would enter negatively. TJie way in which
damage done should be measured is disputed. Some experts measure it
by the expenditures necessary to olTsci the damage - the so-called
defensive expenditures. Others wish to measure it using the kinds of
yaluation techniques which attem pt to elicit willingness to pay to avoid
damage or to improve environmental quality. Under certain circum ­
stances it happens that dclcnsivc expcndiiures arc perfect measures of
W T P, but the use. of defensive expenditures generally to measure
damage done is strongly disputed in the national accounting literature.
M oreover, defensive expenditures indutie both final and intermediate
expenditures, breaking the equivalence between factor incomes and
expenditures which is fundam ental to conventional national account­
ing. Defensive expenditures by firms tcnti to be intermediate expendi­
tures, whilst those by households arc final expenditures. It is significant
that the literature showing how expenditures can be perfect measures of
W T P relates only to the liouseliold context.
Depreciation on stocks of natural capital also requires valuation and
is relevant if die interest is in some measure o f sustainable income, the
income that a nation can receive without running down its capital base,
.In the conventional accounts this is partly accounted for by estimating
net national product (N N P) which is defiiicd as:
N N P = G N P - Dk
where Dk is the depreciation on m an-m ade capital (machines, roads,
buildings etc). The further adjustm ent titat is required is:
N N P = G N P - 1 \ - Dn
■
where D„ is the depreciation o f environmental assets.
T h e box below illustrates both types of adjustment, ie deducting
environmental costs from G N P, and estimating the depreciation on
M O D IF IE D N A T IO N A L A C C O U N T S : A G R I C U L T U R E
A N D F O R E S T R Y IN T H E U N I T E D K I N G D O M
Provisional but non-official adjustments have been made to one sector of the
UK's national accounts: agriculture and forestr y. In line with the requirement
that positive environmental effects (bonelils) be added to G N P for this
What IS economic valuation? . 33
se c to r and that negative effects arc deducted, the following adjustm ents can
be made.
U K fimllion ( I 90Q)
Final marketed oui(>ui
- Inputs ■
= Gross product
- Depreciation
= Net product
I 1.161
=
-
5.663
S.498
1.470
=
-i.oze
+
94
642
152
+ Environmental services
hiodiven'iiY
amenity: green belt
ameniiy; nat. parks
- Government expenditure lo
maintain landscape and
conserved areas, clean-up
pollution
- Household defensive
expenditures
- Depreciation (D„)
carbon fixing
water
= Sustainable net product
58
na
146
11
<4993
T o make the adjustments to net product, estimates w ere made of the per
' hectare recreational and amenity values obtained from sample valuation
studies. These w ere then applied to the whole area under conservation
designations o f one form o r another. Willingness to pay to avoid damage was
not estimated directly. The defensive expenditure approach was used,
omitting com panies’ expenditure and including government anti-pollution
expenditures. N o estimates w ere available for household expenditures.
Natural capital depreciation involved estimates for the net accretion or
release o f carbon dioxide and the valuation of water pollution. Because th is '
secto r has a net fixation rate of C O j this item appears positive in the
adjustments. If household expenditures can be ignored, then the sector's
accounts show an upwards revaluation by 24%, a significant adjustment.
Source: Adger, N and W hitby, M (1991) la n d Use Externalities in National
Accounting' in J Krabbe and W Ftcijman (eds) Nalional Income and Nature:
Exlernaliiies, Growth and Stcody Sicitc Kluwer, Dordrecht, pp 77-101; and Adgcr, N
and W hitby, M (1993) 'Natural Resource Accounting in the Land Use Sector: Theory
and Practice' European Review o f Agncultural Economics, vol 20, no !
34 ■ Economic values and the natural world
natural capital stocks. liowcver the debate about modified national
accounts develops, there is a clear role for economic valuation.
S e t t i n g n a ti o n a l a n d s e c t o r a l p r i o r i t i e s
Information on tlie economic value of policy changes can greatly assist
t(ic governmental process of setting policy and sectoral priorities.
Estimating damage or benefit figures alone will not be sufficient for this
process. It is necessary to compare the benefits of policy with the costs
of policy. The presence of net benefits is sufficient to establish iJiat
existing or planned policy is potentially worthwhile, though not
sufficient to establish that resources devoted to that end would not be
better used elsewhere (net benefits may be greater still if the resources
were put to an alternative use). But if benefits arc less than costs then
it can at least be inferred that resources should not be devoted on such
a scale to the particular goal. This general requirement to review
sectoral priorities in terms of benefits and costs has perhaps even
greater force in the developing world where government income is at a
premium. Indeed, this has always been one of the motives underlying
the development of cost and benefit valuaLioii tccliniqucs for develop­
ing countries. Despite this, sectoral benefit-cost tecliniqucs have been
used in fairly limited ways in the developed world, and hardly at all in
the developing world. Although there arc a great many benefit-cost
Studies of specific policies in both developed and developing countries,
few exist for establishing the worth of overall sectoral expenditures.
The few attempts, however, have been revealing.
United States air pollution regulations probably cost some $13-14
billion in tlic single year 1981. Beyond that, annual costs probably rose
fairly fast as standards were better and more extensively enforced and
regulations grew in number. Benefits in 1973 were probably around $37
billion, and a little above this in 1981. Thus, for 1981, tlie overall air
pollution control policy almost certainly yielded net social benefits.
With a benefit-cost ratio of nearly 3, the rc£ ulations would seem to have
been eminently woriliwhilc and il is unlikely tliat the resources involved
would have yielded higher returns elsewhere. That conclusion needs to
be qualified in several ways.
First, what was probably true of 1981 may not be true of years after
that, especially as regulatory costs probably rose faster than benefits.
Second, the conclusion assumes that all the improvements in US air
quality in 1978 were due to prior legislation. In practice, as evidence
IV/tat is economic valuation? . 35
from a num ber of countries shows, underlying structural changes in the
economy have also contributed to improved air quality: eg switches
from polluting fuels to less polluting ones due to ordinary market
forces, reductions in heavy industry in favour of lighter, less polluting
industry, changed consumer liahits, and so on. Third, the picture
changes somewhat if the rcgulamry policy is looked at in parts. It seems
likely, for example, that 1970s US policy on air pollution from
stationary sources did achieve net benefits, but policy on mobile
sources (vehicles) probably gciici aicd net costs. A similar result emerges
for federal water pollution policy. Costs of around $20-30 billion for
1985 compare to a best estimate of benefits of only some I N billion.
N ot too much can he derived from sucli comparisons, but the results for
mobile air pollution sources and lor water pollution suggest the need to
look carefully at the costs of policy. It lias to be borne in mind, for
example, that the costs quoted are estimates of tlic actual costs involved,
not the costs that could have been involved if the most cfficicm policies
had been pursued. One o f the attractions of mat kct-bascd approaches
(taxes, charges, tradeable qiioiii.s and pcriiiits) is that they have the
potential to keep compiiaticc cosis down. Savings may well be large, of
a factor of two or more coinparcil to the costs of traditional ‘commandand-control’ costs (sec Portncy, 1990).
In the real world of political decision-making, priorities arc rarely set
by reference to measures of costs and benefits. The greatest influence
over policy is in the United Stales. Outside the USA very little actual
influence has been exerted by co.st-bcncfit analysis (Bardc and Pearce,
1991), In part this reflects lack of understanding of the techniques
involved, but in part it rcflccis the fact that dccision-makcrs have
multiple criteria for deciding on policies (nor, of course, arc policies
necessarily chosen on a rational basis from the social standpoint:
chance, favouriii.sm, patronage, whim and corruption arc just as
importatit). Benefit and damage estimation arc therefore likely to be
part o f a wider package of criteria including ilistributionai concerns,
human health, and concerns over the quality of environmental impact
and the sustainability of resource use. Tlic following box illustrates one
possible ranking of cnvironmeatal issues in Nigeria according to
various criteria.
P ro ject, p ro g ra m m e an d p o lic y evaluation
The traditional role for environnieiital damage and benefit estimation is
36 - Econottiic values and the natural woi id
S E T T I N G E N V I R O N M E N T A L P f l l O R I T I E S IN N I G E R I A
T o rank e n v iro n m e n tal p rio ritie s in o rd e i lo obtain guidance fo r d e v e lo p ­
m ent aid to N igeria, the W o r ld Bank a d o p le d the following crite ria:
•
im p act o f e n v iro n m c n ia l deg rad atio n on G N P ;
•
size o f po p u latio n affected by the envn o n m en tal issue;
’ •
in cid en ce by in c o m e g ro u p o f the degi adation:
•
a m easu re o f r e s o u rc e integrity based cm the relation ship b e tw ee n w aste
•
a sim ilar m ea su re o f r e s o u rc e integrity I aised o n a c o m p a riso n o f harvest
( W ) and e n v iro n m en tal assim ilative cap acity (A ); and
‘ and use rates ( H ) c o m p a re d to regem ration rates ( R ) for ren e w a b le
re so u rc e s.
'
T h e results are sh o w n b e lo w (figures in squai e b ra ck e ts are indicative only).
W h ile th e data are clearly im perfect, the .ip p ro a ch yield s so m e c o h e re n t
p rio ritie s, fo r exam p le , soil degrad ation, d e lu i estatio n and w a te r p o llu tion all
ran k 'high' o n each o f the general c rite n .i o f G N P im pact, d istrib utio n al
in cid en ce and r e s o u rc e integrity. Such rafiiJngs can assist nalional p rio rity
setting.
T a b le A Honking environnionini priorities in Nigeria
Issue
GNP
loss
$m /ycar
Soil degradation
W a te r pollution
Deforestation
Coastal erosion
Gully erosion
Fish loss
Wildlife
A ir pollution
W ate r hyacintfi
Source: W o rld Bank
3000 r
K X X )'
750 ‘
C.I50
c.lOO
c. 50
c. 10
na
c. 50
Population
at risk
(millions)
50
40 +
50
<3
<10
<5
<1
35
5
Social
incidence
(iiigher
(n)S.=worse)
7 3
i 4
7 3
i
7 3
3
)
•1
7 3
W > A
H >R
3
3-4
3-4
[2J
2-3
2
na
na
2-3
2-3
[3]
4
2
2
na
4
[IJ
na
W h at IS eL'ti?wmic valuation? ■ 37
in project appraisal. The main manuals that have influenced theoretical
and practical work in economic project assessment have not, however,
addressed environm ental issues. Issues relating to the treatm ent o f
environm ental factors are not, for example, discussed at all in the main
project appraisal technical manuals (see Little and M irrlees, 1974;
Squire and van d cr Tak, 1975; Dasgupta et al, 1972; G itiinger, 1982).
In contrast, assessing environmental impacts has been the subject o f a
wholly separate set o f procedures known as Environmemal Impact
Assessment (EIA), EIA is important in drawing decision-makers’
attention to the many forms of environmental impact. To some extent
EIA also perm its an asscssnicnt ol'the importance of impacts. T he main
problem , however, is that EIA tejids to be pursued cither as an adjunct
to conventional ccononiic appraiMil, or as a precursor. In neither case is
E IA integrated into economic appraisal. Yet comprehensive bcncfitcost assessments require EIA to be carried out if they are to be truly
comprehensive, accounting for environmental itiipacts.
Extending project appraisal to account for environmental impacts, or
to the assessment o f purely conservation projects, presents no concep­
tual problem for bcncfit-cost approaches. Tlic typical bcncfit-cost
assessment (BCA) calculates measured benefits and costs and converts
them into an economic rate of m u m (ERR), In this process, market
prices are adjusted for distortions, ie ccononiic values arc used (shadow
prices). Environm ental impacts arc simply additional costs or benefits.
T he necessity for shadow pricing them tends to arise more from the fact
that they lack a.ssociated markets altogether rather than from the
existence o f distorted markets. Indeed, economic valuation of environ­
m ental impacts is essentially a m atter of shadow pricing. In order to
focus on the environm ent, the iraditional BCA rule for the potential
acceptance of a project can be rc-cxprcsscd as:
T, ( B .- C , - E O x (l •*T)->>0
where Bi is non-environinciKal benefit at time t, C is nonenvironm ental cost, r is the disnm nt rate, ami li is environmental cost
(and the sign would be positive lor environmental benefits). Economic
valuation is concerned with the monetary m easurement o f E in this
inequality. Environm ental issuc.s do, however, raise a further problem,
namely the selection o f r, tlic dt.scount rate, in the above inequality.
Projects
The following box shows how project economic rates of return can be
38
•
Economic values and ihe natural world
R A T E S O F R E T U R N T O A F F O R E S T A T I O N IN
N O R T H E R N N IG E R IA
Careful examination and measurement .of the environmental benefits of
afforestation can greatly increase the 'economic rate of return' to forestry
investments. O n e study assessed the benefits of afforestation in northern
Nigeria as:
•
•
•
•
halting the future decline of soil fertility (since trees typically reduce soil
erosio.n);
raising c u r r e n t levels o f soil fertility;
producing tree products - fuelwood. poles, fruits; and
producing fodder both from raised productivity of soils and from forest
fodder.
T h e net present values (N P V s ) and econom ic rales of relurn (ER R s) that
resulted for shellerbells (planting trees mainly for wind protection) and farm
forestry (intermixing trees and crops) were as shown in Table 5.
Table 5
h n jjo c ls o f olJbrcstcition in n orth ern Nigeria
ShelterbclK
N PV
IKR
Base case
Lo w yield, high cost
High yield
No erosion
More rapid erosion
Soil restored + yield jump
W ood benefits only ( * )
170
NO
221 ■
108
109
263
-95
l'1,9
13.1
16.2
13.5
13.6
16,9
4.7
Farm forestry
N PV
IRR
129
70
19.1
14.5
-
_
75
60
203
-H
16.6
15.5
21.8
7.4
( • w ood and fruit fo r farm fo rc s u y )
Calculation of Umber costs and benefits alone in the Kano area have tended
to show rates of return of around 5%, which has to be compared with the
cut-off rate which is usually much higher, at around 10%. In other words,
afforestation does not pay. But once the other benefits a re included, dramatic
increases in rates of return can be secured.
The analysis shows that counting 'wood benefits' only produces negative
net present value and correspondingly low econom ic rates o f return. But if
allowance is made for the effects of trees on cro p yields, and for expected
rates of soil erosion in the absence of afforest aiion, the picture is transformed
for both farm forestry and shelterbcits.
W hat h economic valuation? ■ 39
. Source,- Anderson, D ( 198 7) r/ic £iui kjuhcs of AgoreuaOoo. o Cose Sludy iVi Afnco Johns
Hopkins Univcrslly Press, Ballimorc: .Tod Anderson, D ( I 909) 'Economic Aspects of
Afforestalion and Soii Conservation Projects' in G Schrarr,m and J W arford
Environmeolol Management and Etoitvnic Devehpment Johns Hopkins University
Press, Baltimore, pp 17 2 - 1O'!
transformed wJicn due accouni is taken of tlic detailed environmental
consequences of planting trees. The analysis makes extensive use of
data on the various physical inierlinkages in environmental and
agricultural systems. Trees have many functions, for example, from
producing tim ber for poles, to fuelwood supply, leaves for animal
fodder, crop wind protection and, in some cases, the fixing of ambient
nitrogen. The principles of benefit-cost analysis (BCA) require that all
impacts be accounted for.
P rogram m es
Just as project appraisal rcquiies eoinprclicnsivc environmental valua­
tion so, logically, docs programme appraisal. Programmes tend to be
amalgams of often interrelated projects, policy measures and developmcrit plans. As with single projects, the environmental implications of
a programme should be evaluated, and the overall return to the
programme should be assessed with reference to the inclusion o f
environmental enhancement components - tree planting, soil conserva­
tion, water supply etc. In programme analysis, environmental rates of
return (ERRs) should still be estimated wlicrcver possible, especially
where the intermixing of policy changes and projects is liable lo make
ERRs higher than if projects alone were being evaluated. The box on page 17 illustrates some of the kinds of benefits from environmental
conservation in a tropical forest context. ,
Choice o f technology
W ithin a programme the issue of choice of tcclmology usually arises. A
given development objective may be met by selecting from a range of
tccliiiological options. The programme objective of meeting a given
increment in electricity dcmaml, for example, involves selection of
incremental electric power sources which contribute to the overall
objective of meeting demand at least cost. Whereas least cost power
system planning has typically been couched in terms of tlicpriuare costs
of generation and distribution, environmental considerations require
that tlie criterion be modified lo become least social cost, ie inclusive of
40 • Economic values ami ihe natural world
the environmental impacts o f different energy tcclinologics. In some
developed economies lliis redefinition lias resulted in the estimation o f
‘externality adders’. These arc llic surcliarges or credits to be attached
to specific energy tcclinologics according lo their relative environmen­
tal impacts. Expressed in this way, the credits and debits have to be
measured in m oney terms, so that il is tfic monetary value o f
i
_______________________________________ _____
E X T E R N A L I T Y A D D E R S F O R E L E C T R I C I T Y G E N E R A T IO N
S Y S T E M S IN T H E U S A
Many economists advocate the use of 'adders’ to the ruling prices of
electricity in order lo reflect better the true costs of electricity production
and consumption. Environmental adders would re/lect the damage done to
the environment. O ne study has made the following calculations. The
surcharges are calculated according lo the monelaryvalue of impacts relating
to sulphur dioxide, nitrogen dioxide, carbon dioxide and particulate
emissions. Nuclear power costs are based on the value of damage done by
routine emissions, accidents and the costs of decommissioning.
Table 6
Environm ental surcharges for electricity in the USA
Surcharge
(USc/kW h generated)
Electricity technology
Coal
Conventional
■ Fluidiscd bed combustion
Integrated gas combined cycle
Oil
0.050
0.020
0.025
.
Low sulphur
High sulphur
.
0.077
0.06/
N atural gas
Steam plant _
Combined cycle
0.010
0.010
Nuclear p o w er '
Routine emissions
Accidents
Decommissioning
Nuclear total;
0.1 10
2.3pO
0.500
2.910
W h a t is economic valuation? ■ 41
F o r this p a rtic u la r stu d y, th e rankings w o u ld be (in o rd e r o f m ost damaging
to least dam aging) n u clear p o w e r, oil. coal and gas. T h is is p ro b a b ly in a c c o r d
w ith pu blic p e rc e p tio n fo r the d e velo p ed w o rld . T h e v e ry high p en alty to
n u cle a r p o w e r is seen to be largely a functio n o f the estim ated accid e n t costs.
In te rm s o f n ew plant ch o ice , ih e re lo re , the relevan ce o f this p enalty w o u ld
d e p e n d on m o d iricalio n s to safely designs w h ich w o u ld affect risk facto rs.
Source: O uinger. R ct al (1990) CnmiiiimcDlal Costs of Efecirlclly, P A C E University
C enter for Environmental Legal Siutlirs, W hite P l a i n s , N e w York. September
environm ental impacts that is used to calculate the price adjustments.
T he box above illustrates the kinds of calculation that arc involved. The
‘adders’ are then added to or subtracted from the private costs of
generation. As an illustration, nuclear power might be credited with
avoiding carbon dioxide and acid rain emissions, but it would be
debited with a surcharge for any routine or accidental radiation risks.
Several countries arc expcriinciiiiiig with the estimation o f externality
adders. I f applied in practice, choice o f energy technologies in a leastcost planning system could change markedly.
The Polluter Pays Principle
T he externality addition approaclt extends beyond choice o f
technology. Existing sources o f supply and service can be priced to
reflect environm ental damage, as the general principles o f optimal
resource allocation would require. Adding surcharges in this way is
consistent w ith the Polluter Pays Principle (PPP) which O EC D m em ber
countries subscribe to (see box). T he PPP requires that those em itting
dam aging wastes to the environm ent should bear the costs o f avoiding
that damage or o f containing tlic damage to within acceptable limits
according to national environmental standards. As stated, the PPP does
not require th a t environm ental damage be valued in m onetary term s,
although it could be. W hatever the cost o f achieving the national
standard, that cost should, in tlie first instance, be borne by the em itter
o f waste. T h a t the em itter’s increased costs may then be passed on
partly to the consum er is still consistent with the PPP. T he costs borne
by tiie em itter and the consum er can be thought of as a form of
valuation. Regulatory agencies set standards on behalf o f the voting
population, and the cost of m eeting those standards becomes, effec­
tively, a m inim um estimate of wliat the regulator regards the damage to
42
■
Economic values and the natural world
T H E P O L L U T E R PAYS P R IN C IP LE
T h e rollowrng is the statem en t by the O E C D o f the P o llu te r Pays P rin cip le
(em p h asis added).
I
En v iro n m e n ta l
re s o u rc e s
are
in general
lim ited
and
th eir
use
in
p ro d u c tio n and c o n su m p tio n activities inay lead to th eir d e te rio ra tio n .
W/ieri ih e cost o f ih is d c ie r io ra lio n is n o i u J e q u a ie ly ta k e n into a cc o u n t in th e
p r ic e sy ste m , th e m a rk e t fails lo r e f e c t ih e sc a rc ity o f su ch r e s o u r c e s b o th at
th e n a tio n a l a n d in ie rn u U o n a l le v e ls. Publ>c m easu re s are thus n e ce ssary to
re d u c e p o llu tio n and lo
re a ch a bcMier allo catio n o f r e s o u rc e s by
ensuring that p ric e s o f g o o d s d epen d in g o n the quality a n d / o r q uantity o f
e n v iro n m e n ta l re s o u rc e s reflect m o re <io5el/ t h e ir relative s c a r c it y a n d
that e c o n o m ic agents c o n c e rn e d rea ct acco rd ing ly.
!
In m a n y c ir c u m s ta n c e s , in o r d e r to e n s u r e that the e n v iro n m e n t is in an
a ccep tab le state, the re d u c tio n o f po llu tion b e y o n d a ce rta in level will not
be p ractical o r even n ece ssa ry in v ie w o f the co sts, involved.
3
T h e p rin cip le to be used fo r allocating co sts o f p o llu tion p re v e n tio n and
c o n tro l m easu res to en co u ra g e rational use o f sc a rc e e n v iro n m e n tal
re s o u rc e s and to avoid d isto rtio n s in in lcrn a tio n a l trad e and in vestm en t
is th e so -ca lled ‘P o llu te r Pays Princip ie'. T h is p rin cip le m eans that the
e n v iro n m e n t is in an a ccep ta b le state. In o th e r w o rd s, th e cost of these
m easures sh o u ld b e r e f e c t e d in th e c o sts o f g o o d s o n d s e r v ic e s w hich c a u se
pollution in p ro d u c tio n a n d / o r co n su m p tio n . Such m easures sh o u ld not be
a cco m p a n ie d by sub sid ies that w o u ld cre a te significant d isto rtio n s in
in tern atio n al tra d e and investm ent.
4
T h is p rin cip le should be an o b je ctiv e o f m e m b e r co u n trie s: h o w e v e r,
th e re m ay be e x c e p tio n s o r special ai [ angem ents, p articu la rly fo r the
transitional
p e rio d s, p ro v id e d that th ey
do
not
lead
to significant
d isto rtio n s in international tra d e and investm ent.
Source: O E C D (I9 7 5 J The Polluter Pays Principle: Definition, Analysis, Implementation
O E C D . Paris
b e . N o r is it essen tia l for ilic g en era l P P P to be im p le m e n te d via taxation
or so m e o th e r fo rm o f ‘e c o n o m ic in str u m e n t’ (trad eab le p e r m it,
p r o d u c t ch a rg e, ta x -su b sid y e tc ). T h e P P P is c o n siste n t w ith trad ition al
stan dard se ttin g via ‘co m m a n d and c o n tio P p o lic ies.
N o n e th e less, e c o n o m ic in str u m e n ts have m a n y a ttraction s o v e r
c o m m a n d and co n tro l p o lic ie s. I f th is ap p roach is u sed th e n it is
fu n d a m e n ta l to th eir u,sc that an y charge or tax s h o u ld be at lea st
Whai
f j
economic valuation? ■ 43
proportional to damage done. Valuation liicrcforc becomes important
in giving guidance to the setting o f such environmental prices. The
following box shows how a tax on greenhouse gases might be com puted
using the econom ic valuation o f global warming damage as a base. The
analysis suggests that, if global warming produces an impact on global
national product, or what wc might call global world product (G W P),
D E R IV IN G A C A R B O N T A X F R O M G L O B A L W A R M IN G
D A M A G E E S T IM A T E S
Several studies have attempted lo calculate the monetary value of damage
from global warming. Estimates .u e highly uncertain but can be expected to
improve as the underlying physical data and global circulation models
improve, Nordhaus estimates that damage might amount to some 1% of
gross world product (G W P ) expressed in present value terms. Comparing
this to the probable costs of reducinggrecnhousc gas emissions, he estimates
that the reduction in gases lhal would bring the greatest net benefit to the
world would be some 11% off a baseline trend of projected emissions. The
table below shows the cost and benefit comparison.
Table 7 Costs unJ lirnc/its of reducing ghbot warming
% Greenhouse
gas emission
reduction (% )
1
2
3
4
5
10
11
IS
23
■
Total cost of
reduction
(Sb)
0.04
0.12
0,24
0.40
0.61
2.20
2.90
6.00
30.70
Total benefit
of reduction
($b)
0.60
1.20
1.80
2.30
2,90
5.90
6,40
8.00
14.70
Net total
benefits
w
056
1.08
1.56
1,90
2.39
3.70
3.50
2.00
-16.00
'
The estimates suggest that greenhouse gases - aggregated and measured in
terjns of CO j-equivalent - should be reduced in aggregate by a little over
lO/o. T o find the surcharge necessary to achieve this optimal reduction, it is
■Necessary to calculate the exlr.i damage done by each extra ton of CO^^quivalent. This is $7.30 per ton COj-equivalent for the damage costs shown,
44 ■ Economic values and the natural world
But it would rise to $66 per ton \( damages w ere twice the estimated level corresponding to 2% of G W P ,
These estimates are open to many rcscrvalions. If it Is comparatively easy
to control emissions, then the costs of control may be less than shown,
dictating a higher optimal level o f greenhouse gas reduction, ff there are, as
many scientists believe, certain thresholds beyond which damage would
become very severe, then the benefit estimates would rise, and also justify
stricter controls, Certainly, those countries that are committed to green­
house gas controls, over and above those for chlorofluorocarbons, are
talking about far more extensive levels of control,
Source for data: Nordhaus. W ( 19 9 1) 'A Sketclr of the Economics of the Greenhouse
Effect'Amer/can E co n o n ik R eview , vol 81. no J. [jp 14 6 - 150
o f around 1%, then a very modest ‘cat bon tax’ of about 17 per ton of
COj-equi valent would secure the optimal reduction of greenhouse gas
emissions o f about 10%. But if damage rises to 2% o f GWP, then the tax
is above $60 per ton. Taxes computed so that they secure the level of
pollution reduction that yields the greatest net benefits are ‘optimal
pollution taxes’ and arc special examples of the PPP,
Policies
Policy changes can also be evaluated using the benefit-cost framework
with special reference to environmental implications. The costs of
implementing the policy can be compared with the benefits obtained
from it. The following box shows the computations used to determine
whether or not the finvironmcntal Protection Agency (EPA) would
recommend reducing lead in gasoline in the USA.
E c o n o m ic v a lu a tio n a n d su sta in a b le d e v e lo p m e n t
The need for economic valuation of c iivironincntal impacts and of
environmental assets arises quite independently of the definition of
sustainable development. Simply pursttiug efficient poiicics and invest­
ing in efficient projects and programmes requires valuation to be
pursued as long as it is credible. At the most general level of
intergenerational concern, valuation is still required. If transfers of
resources arc to be made between generations - with the current
generation sacrificing for the future, or future benefits being lost for the
sake of present gain - thcti it is essential to know what is being sacrificed
and how much it is that is being surrendered. It is not necessary.
IV/tac is economic valuation? • 45
T H E U S E O F B E N E F IT - C O S T A N A L Y S IS IN D E C IS IO N
M A K IN G : L E A D IN G A S O L IN E
Under Executive O rd e r 12291 of 1901 in the USA, government agencies
were required to use 'Rcguintury Impact Analysis' (RIA) and lo adopt
regulatory processes that would maximise 'the net benefits to society'. The
O rd e r was the first to establish the net benefit objective as the criterion for
adopting regulatory processes, all hough its adoption has been circumscribed
by existing laws relating to other objectives.
Benefit-cost analysis played an important role in the adoption of
regulations concerning lead in gasoline. Ambient lead concentrations were
thought to be linked to serious health effects, including retardation, kidney
disease and even death. The Envn onmental Protection Agency conducted a
benefit-cost study with the results shown below.
The regulation involved reducing lead in gasoline from 1.1 grams pergallon
(gpg) to 0.1 gpg. The cosls of the rule are shown as 'total refining costs’.
Refinery costs increase because lead has traditionally been used to boost
octane levels in fuel, and other means would have lo be found to achieve this.
The benefits included:
•
•
•
•
improved ciir/dren's health;
improved blood pressure in .adults;
reduced damages from mislueJled vehicles, arising from hydrocarbon,
N O k and C O emissions; and
impacts on maintenance and fuel economy.
C h ild re n 's hea lth
The EP A study found that blood load levels closely tracked trends In gasoline
lead. Medical costs for the core of children would be reduced by reducing
lead concentrations, and there would be less need for compensatory
education for IQ-im paired children. These savings are shown as 'children's
health effects' in Table 8.
A d u l t b lo o d p re s s u re
Blood lead levels were though; lo be assodaictl with blood pressure and
hypertension. Medical costs would be saved if these illnesses could be
reduced. Moreover, some hear! attacks and strokes would be avoided, A
value of a slalistieal life’ of $1 million was used for the latter. The resulting
values show up In the 'adult blood pressure' row of Table 8. They are seen
to be high because of the involvement of morlalily-avoidance in this benefit.
- '1 2 3 3 3 > n i k |
1 N iS ,
2 -
46 ■ Economic values and ihe natural world
I
O t h e r p o llu ta n ts
Reducing lead in gasoline also reduces o ih e r pollutants. This is because
making unleaded fuel t/ic 'norm' reduces the risk o f 'misfoelling'. ie using
leaded fuels in vehicles designed for unleaded fuels. The mechanism w hereby
mtsfuelling is reduced is through the highci- cost o f leaded fuels at the new
low-lead concentration. This deters drivers from purchasing the leaded fuel.
A s misfuelling is reduced, so emissions of H C , N O « and C O are reduced.
Damage done by these pollutants was estimated by studies of ozone
pollution damage (ozone arises from H C .rnd C O emissions), but estimates
w ere also made of the value of the equipment destroyed by misfuelling. The
figures appearing in the row 'conventional pollutants' in the table are in fact
an average of the two methods.
T a b te 8 Reducing lead in gasoline: co.sc. and benepls, USA. 1985-92
1905
1986
198/
900
1909
1990
1991
1992
223
600
547
502
453
414
369
358
1724
5697
5675
5447
5107
4966
4602
4691
0
222
222
224
226
230
239
248
102
914
059
010
708
767
754
749
35
107
170
M3
134
139
172
164
2004
7820
7473
7104
6788
6516
6216
6210
96
60G
558
532
504
471
444
441
I9G8
7212
6915
6573
6204
6045
5772
5769
264 - 1315
1241
1125
1097
1079
IQVO
1078
M O N E T IZ E D
B EN EFITS ($m 1983)
Children's
health effects
Adult blood
pressure
Conventional
pollutants
Maintenance
Fuel economy
T O T A L M O N E T IZ E D
BEN EFITS
T O T A L REFIN IN G
CO STS
N E T BEN EFITS
N E T B EN EFITS
E X C L U D IN G
B L O O D PRESSURE
IV/iaf is economic valuation?
•
M a in t e n a n c e a n d fu e l e c o n o m y
Maintenance costs for vehicles were expected to fall due to reduced
corrosive effects of lead and its scavengers on engines and exhaust systems.
Few er engine tune-ups and oil changes would be needed, exhaust systems
would last longer, Fuel economy was expected to rise as the new
technologies to raise octane levels to what they were previously also
increases the energy content of fuels. There would also be reduced fouling of
oxygen sensors. Maintenance benMiis outweighed fuel economy benefits by
around 6 to I. The totals are shown in the table.
The net benefits from reducing lead in gasoline are seen to be substantial,
even if the blood pressure bencfiu (which dominate the aggregate benefits)
are excluded. Indeed, it can be seen that the regulation would be worthwhile
even if oil health benefits are excluded. In the event, the blood pressure benefits
were excluded from the final decision because the research establishing this
link was judged too recent to permit adequate review. The lead regulation
was also of interest because of the introduction of a 'lead permits system" to
reduce the financial burden on the refining industry. Essentially, this allowed
'lead quotas’ to be traded between refiners. Refiners who found it easy to get
below the limit were allowed lo sell their 'surplus' lead rights to refiners who
found it expensive to get back lo desirable octane levels without lead. The
particular feature of the lead-in gasoline benefit-cost study that made it a
powerful aid to decision-making was the clear-cut nature of the net benefits
even when uncertainties about benefits were allowed for. But it was also
executed carefully and in comprehensive detail.
Source: US Environmental Protection Agency (I987 J EPA 's Use of Benefit-Cost
Analysis I 9 8 I - I 9 B 6 EPA-730:05-B7 028. Washington DC. August; and US EPA
( 1985) Costs and Benefits o f Reducing I i:od in Casoline: Final Regulatory Im pact Analysis
EPA-230-05-85-006. Washington DC, February
therefore, to invoke the pliilosophy o f sustainable development,
however it is defined, to justify a focus on economic valuation in a
development context.
However, if one or more definitions o f sustainable development are
to be espoused, the role o f economic valuation needs to be investigated.
An efficient use o f resources need not be a sustainable one. T lie optimal
rate at which an exhaustible resource should be depicted, for example,
still requires that the rate o f use is positive. In the absence o f repeated
discoveries o f further identical resources, the resource must be
exhausted eventually. Every unit o f use today is at the cost o f a forgone
47
4 8 • Economic values and the natural world
unit tomorrow. Global warming is another example of an activity that
impairs the welfare of future generations. ‘Sustainability’ therefore
implies something about maintaining tiic level of hum an well-being so
that it m ight improve but at least never declines (or, not more than
tem porarily, anyway). Interpreted this way, sustainable development
becomes equivalent to some requirement that well-being does not
(lecline through time. The implication for valuation is now somewhat
different to what is implied by consideration of efficiency alone. It now
becomes necessary to measure hum an well-being in order to establish
that it docs not decline through time, and since environmental assets
contribute lo well-being il is necessary lo measure preferences for and
against environmental change.
T he problem from the point of view of (.levclopmcnt planning and aid
is that a simple ‘trends continued’ cannot be assumed. This is
particularly true if the environmental changes in question risk harming
future well-being in any significant way. In terms of Figure 1, a
development path such as A appears to be sustainable; B is non-
F ig u re I Sustainable devdupment paths
W h a i is economic valuation? • 49
sustainable (but could be ‘cfflciciu’)’ whilst C is both unsustainable and
non-survivablc because average well-being levels fall below some
m inim um level (eg a poverty line). But from the vantage point oj 0 in the
diagram, it may not be possible lo lell
development path a country
is on. H ence, defining sustainable ilcvclopmciit as sustained well-being
is of only limited help in real work! development planning. Observing
that the rate o f grow th of well-being is declining (path C) may be an
early indicator, but that would not detect the unsustainability of path B.
M oreover, A and B look very similar to begin with. W hat mailers is
knowing whether the coudiiions for sustainable development are
fulfilled or not.
If the focus is on the conditions for achieving sustainable develop­
ment, then it may be that wholly iion-cconomic indicators will sulTice.
For example, com putations of the carrying capacity of natural environ­
ments could act as early warnings of non-survivability (path Q .
Carrying capacity measures the num ber of people whose livelihoods
can be sustained by a given stock of resources if each of them consumes
the m inim um level of those resources necessary to survive. I f the
num bers resulting arc less tliaii ilic actual population present then tJic situation appears to be non-survivablc and therefore certainly nonsustainable. Carrying capacity indicators would need to be calculated
on a regular basis for the measure to be useful in this context. Typically,
carrying capacity measures arc jii oduccd on an ad hoc basis and for a
single year only. N one the less they offer one anticipatory measure o f
sustainability. O ther physical nicnsurcs could include assessments of
the rate o f resource use relative to the rate of resource regeneration and
the rate o f waste emissions relative to the assinrilativc capacity of the
environm ent. I t may be therefore that some light will be shed on
sustainability indicators by noii-cconoinic approaches, especially if they
can be developed to include oilier measures of stress and shock to
underlying natural resource systems.
■ T he literature on environmental economics tends to suggest that the
d u e s to sustainability lie in the quantity and quality o f a nation’s eopiVal
stock. Part of the intuition Itcrc is liiat nations arc like corporations. No
corporation would regard itself a.s sustainable if it used up its capital
resources to fund its sales and profits expansion. As long as capital
assets are at least intact, and preferably growing, any profit or income
earned can be regarded as ‘sustainable’. On this analogy nations arc no
different. Sustainable growth aiui development cannot be achieved if
capital assets are declining. Inrlccd, some economic growth models
s o ■ Economic values and the natural wot!d
suggest strongly that if capital assets arc kept intact, one concept of
intcrgencrational equity - that of equalising real consumption per
capita - can be achieved providing population growth docs not outstrip
the rate of technological change. ( I ’his is an im portant proviso, since it
is likely to be met in rich countries but not in the poorest countries).
I f a condition for acliicving sustainable development is that capital
I stocks be kept intact, then the problem of how to tell whether a nation
is ‘o n ’ or ‘off’ a sustainable dcvclopmcm path is partially resolved. It is
not necessary to observe real levels of well-being as sucli, but instead to
look at the underlying condition and amount of the capital stock.
U nfortunately, while this approach solves one problem it raises many
others. First, it is necessary to know what it is that counts as capital.
Second, it has to be measurable, otherwise ‘constancy’ cannot be tested
(constancy throughout sliould be read a.s ‘constant or increasing’).
T he national accounting issue arises again in this context of defining
and measuring capital. Capital assets in the national accounts arc
typically confined to ‘m an-m ade’ capiiai - machines, roads, factories.
Some accounts include some measure of mineral wcaltii as capital. The
depreciation of the m an-m ade capital is then deducted from G N P to
give N N P. A m ore comprehensive def inition o f capital and income
would include human capital (knowledge, skills etc) and natural capital
(environmental assets). The primary condition for sustainable develop­
m ent would then be that this aggregate stock of capital should not
decline. P u t another way, depreciation on this capital slock should not
exceed the rate of new iu vestment in cajtilal assets.
B ut how is the capital stock to be measured? F o r some economics
heavily dependent on one or two natural resources it m.ay be possible to
use a physical indicator of rc.scrvcs or available stocks. But for the vast
majority, it will be necessary to fipti a measuring rod for capital.
Typically that means money units - ic it becomes necessary to value
capital, including environmental capiial. Valuation and sustainable
devclopmcin arc again intricately linked. How fa r this link matters
depends in large part on how likely unsustainable development paths
are, and, of course, on the value judgcim nt that sustainability ‘m atters’.
Opinions differ. Past development suggests that technological change
and the expansion of hum an knowledge will make resource use more
and more efficient with hcncfits to subsequent generations. Some
tecluiologics have, of course, brought liicir own damage costs (chlorofluorocarbons, for example): technology is not a free good. How far
future development will be sustainable perhaps revolves round the issue
What IS economic valuation?
■
51
o f irreversibility, 'The m ore irrcvei sib lc th e claiiiagc done by the current
gen eration , th e few er degrees o f li c cd o m future generations w ill have to
expand their ow n w ell-b ein g . Su.siainabJc d evelop m en t certainly looks
as i f it sh ou ld be partially gu id ed by th e need to avoid irreversibly
sign ifican t dam age.
I f secu rin g sustainab le d ev elo p m en t has som eth in g to d o w ith
m on itorin g and m easuring aggregate capital slock s and not allow ing
them to d eclin e, tlicn there need he no particular role for environ m ental
protection in sustainable d evelop m en t. E nvironm ental assets could
d eclin e in quan tity as long as depreciation in these assets was offset by
in v estm en t in oth er m an -m ad e assets or h um an capital. B ut ev e n if this
view o f su stain ab ility is accep ted , th en valuation is still central to th e
process. F or it is n ot then j'ossib lc to k now w h ether o ffsettin g
in vestm en t has taken place unless there is som e m easure o f the rate o f
dep reciation on natural assets and their forgon e ec o n o m ic rate o f
return. S till others w ill want to m ake a special case for the en viron m en t.
T h e accep tab ility o f ‘ru n n in g d o w n ’ environ m cm al assets p rovid ed
other assets arc built up will dep en d on tcJativc valuations and
ju d gem en ts about other m easures o f sustainab ility, as w ell as on the
m oral v iew about d estroyin g the environ m ent.
T h e fo llo w in g box sh ow s a p ossib le em pirical interpretation o f the
M E A S U R IN G S U S T A IN A B L E D E V E L O P M E N T
An economy is su stainable
if it
saves nu^re than
the dept ccio iio n on its m an -m ade
a n d n a tu ra l ca p ila l
Table 9 show s estim ates of the p n 'j)o rtio n of savin:;5 to national incom e in
selected eco n o m ies; the am ount of depreciation on rnan-m adc capital (as a
percentage of im o m e ) and cstiin .iies of the d epreciation and damage to
natural r e s o u r c e s and the cn viro iu iicn t (again expressed as a percentage of
national in co m e). If savings e x cee d s the sum o f the tw o estim ates of
depreciation and damage, the c c o n o m y is 'suslainaltic'. O tiic rw is e it is not.
T h e m easure is cru d e and simplrUic and the estim ates o f environm ental
damage are especially linnited. Bul tlic analysis is suggestive. T h o se eco n o m ies
w c might expect lo be unsuslaiii.il>(e. certainly arc. N o te that the rule used
here is w hat w e cafi ‘w eak sustainability' since it assumes that natural and manmade capital arc perfect substituics. Much o f the literature on ecology
teaches us that liiis is not true. A sli Icier, strong sustainability' m easure may
be preferred.
'
52 • Economic values and the natural world
Table 9 Sfnio/noM/l/ o f s e tc c in !
s/r
Sustainabie economies
Brazil
Costa Rica
Czechoslovakia
Finland
Germany (pre-unification)
Hungary
Japan
Netherlands
Poland
USA
Zimbabwe
-
5 h/ Y
1
national econom ics
-
5r^/Y
20
26
30
28
26
26
33.
25
30
18
24
3
10
IS
12
10
M
10
II
1?
10
24
15
12
II
12
4
2
3
20
C
8
-4
I
1
5
1
7
4
,3
9
10
9
17
16
4
6
17
7
10
8
7
2
4
5
2
1
3
4
5
=
Z
+ 3
+ 15
+13
+1 1
+ 10
• 11
+17
+ 14
+ 16
+ 2
+ 9
Alorginaffy sustoinoble
Mexico
Philippines
0
0
Unsusiainabie
Burkina F,iso
Ethiopia
Indonesia
Madagascar
Malawi
.
Mali
Nigeria
Papua N ew Guinea
15
15
-9
-7
-2
-9
-3
-14
-5
-1
Note: S = national savings. Y - nalional income, 5m = deprecialion on man-made
capital, 5n = depreciation and damage to natural i csourccs and the environment. Z =
(w eak) suslainabilit)'
Source: Pearce. D W and Atkinson, G (1 9 9 7 } A ie N ation al Econom ies Sustainable?
Development Centre for l.Licial and Economic Research on Ihe
Global Environment (C SEP.G E), University College London
M ea su rin g Sustainable
liiik between econom ic valuation and unc approacli to determ ining
whether a country is on a sustainable developm ent path. T h is approach
is term ed ‘weak sustainability’ and rcficcts the idea tliat a country needs
to save m ore than the depreciation on its assets if it is to be judged
W/taC is economic valuation? ■ 53
sustainable. (Strictly, the rule is that it needs to save more than the sum
of asset depreciation and tlic willingness to pay to avoid environmental
damage - see Pcarcc and Atkinson, 1992). Writing the rule as;
S > Dm + D n
where S is savings and D m is ‘depreciation’ on man-made capital and
D n is depreciation and damage related to environmental assets, then we
can use tlic measures of damage from the ‘grccti G N P ’ studies to
measure D n. Estimates of S arc readily available, and estimates of Dm
exist for quite a luiinbcr of couiurics. The approach is illustrative and
the data arc very iiiipcrfcct. Hut llic result is instructive. Countries that
intuitively seem unsustainable timi out to be unsustainable. Recall that
this is the ‘weak’ definition of sustainability. A stronger definition
would require that there be no net damage to environmental assets
overall, closer to the way many environmentalists (and ecological
scientists) would see the world.
Discussing sustainable development in broad terms risks giving the
impression that philosophers and economists fiddle while the Rome of
under-development burns. But there is notiiing in the ideas of
sustainable development that lessens the emphasis on development
now, or on targeting the most vulnerable. It will risk this if it is used to
justify large sacrifices of real irtcomc and well-being now for very long
term gains that arc highly uncertain. Eliciting economic values can help
guard against the latter risk by showing, as far as possible, where and
when environmental protection yields the highest returns.
C hapter 3
V a lu a tio n an d d isco u n tin g
th e fu tu r e
IN T R O D U C 'I IO N
Many environmental problems - nuclear waste storage, nuclear power
station decommissioning, llic release of long-lived inicropollutants,
ozone layer depletion, global wanning - are likely to have their major
impacts well into the future. The costs arc therefore likely to be borne
by people alive in 50 years time and alter that. Conventional benefitcost, approaches would regard $1 of future damage as being less
important that $I of damage now because of the phenomenon of
discounting. The underlying value iudgements of bcncfit-cost analysis
are that 'people’s preferences count’ and that preferences arc justifiably
weighted according to the existing distribution of incomes. I f the
sovereignty of preferences is to be applied consistently, then the bias of
the preferences of the current generation towards present as opposed to
future benerus, and against present as opposed to future costs, needs to
be reflected in dccision-iuakiug aids, d'liis is the essential rationale for
discounting. Typically, any benefit (or cost), B (or C), accruing in T
years’ time is recorded as having a ‘present’ value, PV, of;
where r is the rate at which future benefits are discounted, the discount
rate.
The problem that arises with discounting is that it discritninales
against future generation.^ In one sense this discrimination is deliberate
- the discount rale is meant to disciiuiiiiatc in this way, this is its
purpose. But such a discrimination presupposes an agreed objective to
the effect that meeting the currcntgcncj ation’s wants is more important
that meeting future generations’ wants. Discounting is consistent witli
imposing a major cost on the future for the sake ofa relatively small gain
V ahuiiw n a n d discounting • 55
now. T h e usual justification for this is that future generations will be
better o ff anyway - their incomes will be higher because of economic
grow th. T hey will therefore attach less value to an extra $I of income
thgn a current generation (the ‘dim inishing marginal utility of incom e’
argum ent) and will perhaps be better placed to counteract any ill effects
o f current generation activities that spill over to them. To see the kind
o f implied shifting o f burdens, a cost accruing in 100 years time and
am ounting to $100 billion would, at a 10 p erc e n t discount rale, have a
present value of
$1 DO billion
(1.1)'"“
which comes to $7.25 million. Tlml is, any bencl'il-cost study ofa project
imposing such a I'ulurc cost would record the damage done at only
$7,25 million even though the actual damage done is nearly 14,000
times greater than this. If there is concern with intergenerational equity,
then, discount rales o f the order of 10 per cent - whicli are typically
applied to investm ents in the developing world - would be inconsistent
with that concern.
ACCOUNTING FOR 1-UTURE GENERATIONS
Intergenerational concerns would llicrcforc seem to call for some fairly
fundam ental revision in the way project and policy appraisal is carried
out. Tw o broad categories ol‘ modification have been suggested,
although it is as well to note that all the argum ents are the subject of
extended controversy. T he first set o f modifications requires what
might be called a ‘two tier’ approach. Allocations o f resources over time
arc treated differently to allocations within a period of time. Some kind
o f ‘sustainability rule’ is applicLi to the intergenerational allocation, and
fairly conventional rules, such a.s maximising the net present value o f
benefits, are applied within a liinc-frame. T he second set of modifica­
tions is made directly to tlie di.scount rate itself, ic the framework of
maximising net present values is left intact, but the actual rate of
discount is changed to reflect intergenerational concerns.
S u s ta in a b ility c r ite r ia
Some authors argue that simply clianging the discount rate - usually by
lowering it - is a mistaken procedure because what is being done is to
5(5 - Economic values am i the n a tu ra l w m lJ
attem pt to modify a procedure based oo efficiency gains and losses for
a m ajor icdc/inition of tJic underlying ob/cctivc - iniergencratioual
fairness. On this arguinciit, it should not be surprising to find that an
issue of fairness caiuiot be handled by modifying cllieicncy criteria.
Added to this, an appraisal procedure that evolved from concerns with
mainly localised and certainly marginal changes to the state of the
j ccoiKjmy is being called upon lo apply to issues that arc global in a non­
marginal sense, ie signil icant cliangcs in well-being are involved. A tool
for fine-tuning decisions is being applied to contexts where fine-tuning
is not tlic issue. M ore fundamentally, transfers between generations
should not be treated in the same way as decisions about how lo use
resources available to tlic current generation. Equity issues w ithin a
generation can be treated by making resource transfers between
individuals. Equity issues between generations need lo be treated the
same way; pursuing efficiency within a generation docs not guarantee a
fair distribution o f resources through lime.
One way to avoid some of the concerns about discounting is to
impose a sustainability constraint. Essentially, this amounts to form ulat­
ing some rule which would maximise gains to well-being now provided
this does not reduce the well-being of luturc generations below that of
th e current generation (very mucli in line with the B rundtland
Commission definition o f sustainable development). This is a depar­
ture from benefit-cost analysis because it requires well-being to be
constant or increasing over lime. Eenefil-cost analysis would be
consistent with reducing current well-being if it yields a greater benefit
for future generations, and vice versa. Rules o f this kind have been
form ulated in terms o f maintaining overall stocks of capital o f all kinds
- m an-m ade, hum an and natural. The basic idea is not to ensure equal
(or rising) well-being through time, but equal or rising capability of
generating well-being through time. T he stock of capital is the means of
raising well-being, and hcncc it is this stock diat has to be maintained
or improved.
In practical terms such rules would i cquire m onitoring and measure­
m ent of capital stocks and an invesCmcitt policy that sought at all times
to ensure that net investment offset depreciation (‘compensating
investments’), The main dilficultics would lie in the issue of measuring
capital since pliysical units would not be adequate due to the
heterogeneity of capital (the ‘adding up’ problem). I lcnce a valuation
procedure would be ncctlcd. T hen ciilicr the total value of the capital
stock would be monitored and adjusted so that it is constant or rising,
Valuation and discounting ■ 57
or perhaps the price of the capiial stock would he used as an indicator resource prices, for example, would be monitored and demand and
supply adjusted so as to secure constant real prices through time.
As yet little advance in this area lias been made beyond the attempts
to recompute G N P to reveal net investment levels that allow for
depreciation on some natural capital assets. Such procedures are
promising, but to be all-embracing they would have to be extended to
all forms of non-markcted capita! and especially environmental capital.
At the global level substantial jiroblems arise - some forms of capital
will depreciate because of past actions (the ozone layer, the E arth’s
surface tem perature, for example). How is the ‘stock’ of such assets to
be measured? Valuation can assist but the prospect is fairly daunting. It
becomes necessary to know not just the ‘price’ of global wanning (the
marginal damage done) but how that price will change over time.
Sitnilarly for tropical forests, wetlands, etc.
Economists, philosophers ani.1 ecologists arc only just beginning to
tackle the ways in which ‘sustainability’ could be measured (see the
discussion in Chapter 2, and the box on page 51). Fairly clearly, many
of the implications of sustainability, however defined, will be the same.
Non~marketed assets must not l)c treated as if they have a zero price.
Environmental impacts must be fully accounted for. The national
income accounts m ust be modil icd. But whether it is enough to raise
significantly the probability of securing sustainable development is not
clear.
M o d if y in g th e d is c o u n t r a ta
Environmentalists have tradiiioi lally been more concerned to sec actual
discount rates lowered. Four approaches to modifying discount rates
may be considered. These arc:
1
2
3
4
setting the discount rale equal to zero;
computing a consumer discount rate;
computing a producer discount rate; and
computing some weighted average of consumer and producer rates.
Zero discount rates
The argument for zero discount rates is essentially as follows. The point
in time at which an individual exists cannot affect that individual’s well­
being. There has to be ‘impartiality’ about time. Well-being at one
point of time cannot count nioi c than well-being at another point of
5 8 ■ Economic values and ihe natural world
time. This argument has a long tradition in utilitarianism, for example
being clearly stated by Sidgwick, One defence of impartiality widi
respect to time is given by Rawls in terms of his ‘original position'
argument. An imaginary group of people coming togetJicr to determine
an allocation of individuals to social groups and to time would not
choose to favour one group or one time period over another since they
I would not know to which group or tiiiu period they llieinsclvcs would
be allocated. Thus there must be nu discrimination between time
periods if there is to be a ‘just’ allocaiiuii.
There are two sources of discoum tug. The first relates to tht
discounting of consumption streams and this would be justified bj
assumptions about diinijiishing marginal utility of income. The second
relates to the discounting of utility itscil . The latter is perhaps what is
meant by true ‘time preference’, the foi incr being due not to time but
to differences in tlic levels of consumption. It can be sliown that if time
■preference is zero and interest rates arc positive (for the first reason)
then any individual woulcl rationally rctlncc consumption levels now to
zero in order to make the marginal utility of such consumption infinite.
Everything would be transferred to the future. Adopting a zero rate of
discount for utility - which is what pure equality of treatment for
generations would signify - would imply a policy of total current
sacrifice. It would appear that zero rates may have implications
contrary to the purpose advocated by iJiose who want them.
Consumer discount rales
T he standard formula for discounting future consumption is:
dc = a + pg
where dc is the consumer discount raic, a is the ‘rate of pure time
preference’ (ic utility discounting), p is tlic elasticity of the marginal
utility of consumption function, and g is the growth rate of per capita
consumption. I f the utility function linking Utility to consumption is
logarithmic, then p = 1, IJj further, pure time preference is rejected on
ethical grounds, then o = 0 and wc liavc dc = g. The discount rate
becomes equal to the (expected) raic of growth of per capita
consumption. Taking past growth rates as a guide to expected rates, the
following box shows estimates of dc foi selected countries.
One result of this approach is that discount rates for the poorest
countries become negative. Yet bcliaviuur towards natural resource
endowments in those countries is dearly inconsistent with this
Valuaiion and discounting
-
59
ES T IM A T IN G D I S C O U N T RATES
D isco u n t rates based on individuals' tinne p refe ren ce can be estim ated
by
using the eq u atio n given in the text. T h is req u ires an estim ate o f'p u re ' tim e
discounting, a m e asu re o f the elasticity o f the marginal utility o f in co m e
function, and an estim ate o f e x p e cte d g ro w th in real co n su m p tio n p e r capita.
M any e x p e rts ignore ‘pu re' lim e disco u n ting and c o n ce n tra te on the o th e r
c o m p o n e n ts.
T a b le 10 Est/moies o f sclct icd naiional discowti rates f% pa)
Country
USA
UK
Japan
Ethiopia
Ghana
Chile
Thailand
Note; assuming
Grow th of
real pr ivate
consumption (1 )
3,3
2.8
3.0
2.4
1.7
0,0
5.8
Grow th of
population (2 )
1.0
0.2
1.0
2.8
2.6
1.7
2.5
Discount rale {% )
(1 - 2 )
+2.3
+2.6
+4.0
-0.4
-0.9
-0.9
+3.3
'
= 0. p = I
Source: G row th rates compuied I96S 1900 from W o r ld Dank W orld D cveh pm eni
Report 1990 O xford University Press, ( 'xford
outcom e, ie resources arc dcplctcrl as if personal discount rates are very
high. M oreover, market lending rates arc positive and high. T h e
application o f the incom e utility approach in these contexts m ay be
questioned. I l im plies, for exam ple, that as incom e doubles the
household enjoys only h alf o f the utility from the extra unit o f incom e.
T h e box suggests that rates iur industrialised and industrialising
countries w ould appear to be in the range 2-4%. Estim ates will,
how ever, be conditioned by llic past period used to make the
calculation. M oreover, w hile the value o f unity for p is convenient som e
em pirical work suggests values o f around 1.5. T h e effect o f p = 1.5 in the
box is to raise the effective discount rates to 4% for the U K and U S A ,
and over 6% in Thailand and Japan. T h e exclusion o f a from the
estim ates has also to be questioned. L ittle evidence exists about pure
6 0 - Economic values and the n atural world
tim e preference rates in (lie industrialised world: a rate o f 1.3% for the
U K has been suggested, for example. Atldcd to the rates in the box this
would suggest a consumer discount rate in the UK, inclusive of ‘p u re’
time preference o f about 4% for p = 1 and 5.3% for p = 1.5.
Producer discount rates
I f capital markets were perfect, rates of return on capital would be equal
to the rate dc above. In practice, a num ber o f distortions in the market
place give rise to divergences between dc and the producer rate of
discount dp. Corporation taxes, for example, mean that a company must
earn r% if it is to pay its shareholders s% where:
r = s /( l- t)
where t is the corporation lax rate. Company taxation necessarily makes
the producer borrowing rate higher than tiie rate at which consumers
discount the future.
.
M any economists argue that r% is the ‘correct’ rate of discount
because it measures the opportunity cost o f using up $1 in public
expenditure, ie it is the forgone rate of return on the marginal
investment in the private sector. T o find r one might take the weighted
rale of return on equity and debt. The resulting long-run weighted
average cost o f capital to tJie private sector in the industrialised world
would be perhaps 7% in real terms.
Clearly, if a discount rate of 7% is used, damages from distant
environm ental impacts such as global warming would appear insignif­
icant in any bcncfit-cost comparison.
Synthetic discount rates
Any public expenditure on environmental controls would not simply be
at the expense o f private investment. It is more reasonable to suppose
that it would be at the cost o f some private investment and some
consum ption. If so, a ‘synthetic* rate o f the form:
s = Wp.dp + Wfdc
would be appropriate. I f it could be assumed that the weights for
marginal investments arc the same as the weights for existing
expenditures, then the shares o f consum ption and investment in
national income could be used. I f a long-term consumption growth rate
of 1.5% is used togctlier with a = 0 and p = J, and dp = 7%, then a typical
synthetic rate for an industrialised country with an 85% investment
Valuaiuin and discounting - 6J
share in national Income would become around 2.3%. It is difficult to
argue that it is any lower than tJiis.
CONCl.USIONS
There are two broad options for accommodating the distant nature of
the effects of global warming and other environmental costs. The first
requires that some intergencraiional critcrioji of sustainability be
imposed, leaving the ‘convcntionar discount rate unmodified as a
means of allocating resources wilhin a generation. The second involves
seeking some quantitative adjustnicnt to the conventional discount rate.
The problem with the former adjustment is that, as yet, few specific
rules for practical operation have emerged. Indeed, it may be that there
is no requirem ent for special rules; each concerned individual simply
argues for a ‘fairer’ allocation of lesources to the future. The problem
with the second approach is lliai it takes fairly heroic assumptions to
make a quantitative adjustmcm that is other than arbitrary. The
‘discounting problem ’ is not resolved either way in terms of rcal-worJd
conclusions. I f discount rates above 1-2% are used, an issue such as
global warming is very unlikely to be seen as significant. Future
generations would simply have to bear the cost. Rates of perhaps 2% can
be justified if utility discounting is rejected as unethical - which seems
valid given the whole idea is to account for intcrgcnerational equity - if
opportunity cost discounting is ignored, and if specific restrictions are
placed on the nature of the income-utility function. Use of the
opportunity cost rate cUone docs not appear justified, so that the
appropriate range of estimates ajipcars to be perhaps 2-5%.
Chapter 4
V a lu a tio n in p r a c tic e
SETTING PRIORITIES
This chapter focuses on the issue of valuation mainlyj but not
exclusively, in the developing world. Chapter 1 indicated why it is
im portant to engage in the activity of economic valuation. 'I’o the
reasons given tlierc wc may now add another one. Increasingly, the
world has come to recognise that the developing world has a limited
capability for protecting its own environments, but an increasing need
to do so since future development is milikcly to be sustainable without
that protection. T his recognition has been formalised in the recom m en­
dations o f ‘Agenda 21’ at the E arth Sum m it conference at Rio de
Janeiro in 1992, and in the conventions which govern the future control
o f greenhouse gas emissions and the protection of biological diversity.
In short, there will have to be significant additional resource transfers
from N orth to South. But the funds for such transfers arc themselves
lim ited, so that priorities need to be established. How can those funds
best be used? T he answer, again, has to lie in com puting the ‘rate o f
retu rn ’ to such investments, and comparing rates of retu rn across
diffcrcht kinds o f investments, even if only in very broad brush terms.
But investing in thecnviionm cnt produces ihc problem that the rctiinis
are not always marketed, as wc have seen. Hence it is necessary to
derive, as far as possildc, economic values of benefit from such
investments.
The economic valuation of environmental change and natural
resources is reasonably well csiablishci.1 in tlic developed world, but is
a comparatively new activity for tlic developing world. M uch valuation
relies for its credibility on the existence of wcll-functioning property,
goods and labour markets. In so far as these markets operate with
extensive government intervention in the developing world, the scope
for valuation appears to be more
than in the developed world.
This fact has not inhibited valuation studies in Eastern Europe where,
perhaps surprisingly, valuations of the economic damage to the nation
Valuation in practice ■ 63
from pollution, especially air pollution, have been carried out on a fairly
regular basis. But the problems of credibility of the estimates are liigh.
Damage by acid rain to buildings, for example, lias been estimated to be
as high as $1.8 billion in Poland, or around 2.7% of GNP. If true, such
losses would be massive and would justify significant expenditures on
pollution control regardless of any impacts of air pollution on human
health, crops and forests. But the methodologies used to arrive at such
figures are primitive. Moreover, the prices used to value increased
repair and rebuilding due to foieshortened building life arc adminis­
tered prices. The theory of valuation, however, requires that the prices
used be markct'clcaring prices in the domestic market or border prices.
As a result it is difficult to place limits of reliability on such estimates,
making their policy relevance vci y doubtful.
N or arc valuation exercises in the developed world sufficiently
advanced to give many insights into the setting of overall environmental
priorities for the developing world. Few studies have compared
benefits and costs for a single environmental medium (air, water etc)
and fewer still have compared did’c rcnt media. As a result, it is difficult
to say whether $1 in Europe, say, is better spent on controlling air
pollution rather than water pollution. Even if this information was
available, its implications for the developing world would not be readily .
transferable.
From the limited informatioji available, the following speculative
conclusions might be derived.
First, it seems reasonable to focus environmental policy on two broad
targets: increasing net gains to G N P, and improving human health.
M ethods of raisitig G N P by envir onmental conservation and improve­
ment need to be thought of in the broadest sense. Wildlife conservation
may pay handsomely if it can be associated with tourist revenues.
Conserving tropical forests may involve some ‘development’ sacrifices
but could be rewarded if imcrnational resource transfers compensate
for the losses. Attracting investment from the Global Environmental
Facility would be an example. The focus on G N P ought to be
contingent upon avoiding significant irreversibilities. That is, a G N P
gain siiould not be souglit at the crjst of a major environmental cost that
is irreversible and not recorded ici conventional GN P.
Second, and focusing on G N P gains, investment in soil conservation .
and forms OHafforestation would a;jpear to have potentially high rates of
return. Broad-brush calculations on soil conservation by the United
Nations Food and Agrkullure Organisation (FAO) suggest that
64 ■ Economic values and the natural world
unchecked erosion could cost some 19% of Asian, African and Central/
South American crop output between 1975 and 2000. Some individual
country studies of damage done produce very high estimates of damage.
In Zimbabwe, for example, valuing nutrient losses from soil erosion in
terms of the artificial fertilisers needed to replace tliem produced a
staggering $1,5 billion estimate for 1985, one third of Zimbabwe’s
IGNP. Clearly, the policy implication to be derived from this is not tliat
G N P would rise by one-third in the absence of soil erosion. An anti­
erosion policy would clearly cost significant resources itself. But the
magnitudes are indicative of the kinds of gains to be had. Economic
rates of return to soil conservation arc also often higli, although final
judgement requires a far more substantial body of literature relating to
the developing world rather than the well-buffered soils of some
developed economies, and careful accounting for all costs and benefits.
In both cases of soil conservation and afforestation much of the
return is likely to be iti the form of damage avoided rather than visible
net gains in the form of increased production. This presents a
perception problem for farmers and others: investment to maintain
economic activity tends to appear Jess attractive until the dramatic
consequences of failing to prevent damage actually arise.
To sonic extent, the expectation that damage from soil erosion and
biomass loss will be high may rellecl the fact that, in a limited literature,
these areas have been studied. The economic rate of return for improved
water quality in the developing world i.s much under-researched. The
num ber of work-days lost from waterborne diseases in Africa, Asia and
Latin America, for example, may have totalled some 250 billion in the
late 1970s. At just 50 cents per day this would amount to a staggering
$125 billion lost output, perhaps 10% of gross world product for the
relevant regions in the laic 1970s. In the ticveloping world high rates of
return to water quality investment will almost certainly exceed rates of
return to air pollution control. In tlic developed world, where drinking
water quality largely precludes the presence of waterborne diseases, the
balance may switch back towards air pollution control. In truth,
however, valuation studies have not progressed far enough to under­
score these conclusions.
FINDING WILLINGNESS TO PAY FOR CONSERVING
ENVIRONMENTAL ASSETS
Valuation in practice ■ 65
p a y (W T P ). T h e ra n g e o f tc c lin iq u c s available fo r elicitin g w illin g n ess
to p a y is fa irly w ide (sec A p p e n d ix I I). T h e ir a p p lic a tio n in th e
d e v e lo p in g w o rld is v e ry rec cjit. S o m e ex am p les rev eal th e u sefu ln ess o f
in v e stig a tin g th e ajjp Jicab ility o f W T P te c h n iq u e s.
Valuing p r o te c t e d a re a s
P ro te c tin g w ild e rn e s s areas te n d s lo b e a low n a tio n a l p rio rity in m a n y
d e v e lo p in g c o u n lric s . T liis is especially tru e w h e re p ro te c te d lan d
c o m p e te s w ith th e d e m a n d fo r land fo r a g ric u ltu ra l c x tc n sific a tio n , an d
w h e re d o m e s tic v alu es fo r lan d arc low re lativ e to th e ‘g lo b a l’ value
a ffo rd e d it b y re s id e n ts o f o th e r c o u n trie s. N o ta b le e x am p le s o f th e
fo rm e r in c lu d e m a n y o f tiic n a tio n a l p ark s in A frica, a n d th e la tte r
w o u ld b e ty p ifie d by tro p ic a l fo rests, u n iq u e w e tla n d s, coral reefs and
m a n g ro v e sw a m p s w h ic h te n d to he ric h in biological d iv e rsity .
S o m e se n se o f e c o n o m ic value c an be o b ta in e d by lo o k in g a t th e
IM P L IC IT W IL L IN G N E S S T O PAY F O R E N V IR O N M E N T A L
A S S E T S IN IN T E R N A T IO N A L T R A N S F E R S
D eb t-for-na tu rc sw aps
Num erous debt-for-nature swaps have been agreed. Table II be/ow sets out
the available information and com jjuies the implicit prices. It is not possible
to be precise with respect to the impltcii prices since the swaps lend to cover
not just protected areas but education and training as well. M oreover, each
hectare o f land does not secure tlio s.ime degree o f protection’ and the same
area may be covered by different s w . i j j s . W e have also arbitrarily chosen a 10
year horizon in o rd er to compute present values whereas the swaps in
practice have variable levels of annu.il commitment.
Ignoring the outlier (M onteverde t.'loud Forest, Costa Rica) the range of
implicit values is from around I cent/ha to just over 4 dollars/ha. Ruilenbeek
(1992) secures a range of some 10 i ents to $1 I/ha (ignoring M onteverde)
but has several different areas for some o f the swaps and he also computes
a present value of outlays for the swaps. But either range is very small
compared to the opportunity cosls o f protected l.uid, although If these
implicit prices mean anything they ai o capturing only pari of the rich world's
existence values for these assets. Thai is, the values reflect only part o f the
total economic value.
Finding a benchmark from such an analysis is hazardous but something o f
the o rd er of $5/ha seems approfii i.ite.
66 • Economic values and the natural worUi
T a b le 1 1 Imptial willingness (o yay u> dcbl-foi '-nature swaps
Country
Date
Payment
(1990$)
A ; ea
(m ha P V )
Bolivia
8/07
112,000
l./OO
0.0/
1
Ecuador
12/87
4/09
354,000
1,068,750
//.no
0.06
2
1.15
0.80
3
0.81
1.40
0.014
4,32
1,40
25.70
4
5
6
9,06
0.06
7
047
2.95
8
}
W T P /h a
(1990$)
Notes
Costa Rica:
La Amistad
Monteverde
2/08
7/88
1/89
4/89
3/90
1/9/
918.000
5,000,000
784.000
3.500.000
1,953,473
360.000
Dominican Rep,
3/90
1 16,400
Guatemala
10/91
75.000
Jamaica
11/91
300,000
Philippines
1/89
0/90
2/92
200,000 )
438,750
>
5,000.000
7/89
8/90
1/91
950,000
445,091
59.377
4 parks
Madagascar
Mexico
.
2/91
100,000
Nigeria
7/91
64,780
Zambia
8/89
454.000
Poland
1/90
11.500
Nigeria
1909
1,060,000
1
»
9
10
uiirclaied to area purchase
1 04
0,58
11
N oles
A discount rate o f 6% is used, togclher witli a time tiorizon of lOyears. The sum of
discount factors for 10 years is then 7.36.
,
1. The Beni park'is 334,000 acres and the sui i ounding buffer zones are some 3.7
million acres, making 1.63 million hcclu/cs in all (1 hectare = 2.47 acres),
i .63 X 7.36 ” i 2 million hectares in present value terms.
2, Covers 6 areas: Cayembe Coca Reserve at 403,000 ha; Cotacachi-Cayapas al
204,000 ha: Sangay National Park at 370,000 ha: Podocarpus National Park at
146,280 ha; Cuyabeno Wildlife Reserve at 754,760 ha; Yasuni National Park -
'
Valuation in practice ■ 67
no area stated; Galapagos National Park at 691,2000 ha; Pasochoa near Q uito
at 000 ha. The total without Yasuni is therefore 2.07 mha. Inspection of maps
suggests that Yasuni is about three limes the area of Sarrga/, say Imha. This
would make die grand total some 3 mha. The PV of this over 10 years is then
22 mha. This is more than twice the comparable figure quoted in Ruilcnbcek
(1992).
3.
d.
5.
6.
7.
0,
9.
10.
I I.
Covers Corvocado at 'II,7CQ ha; C.uanpcasle at 110 ,0 0 0 ha; Monieverde Cloud
Forest at 3,600 ha, to give 156.600 ha in all, o ra present value of land area of 1,15
m ha. Initially. $5/1 million at face value, purchased for $9)2,000, revalued here
to 1990 prices.
Guanacasle ai I 10.000 ha. to give a PV of 0.01 mha.
La Amistad at (90,000 ha. to give a PV of i.'l mha.
Monteverde Cloud Forest at 2023 ha « 7.36 = M,900 ha.
Area 'protected' is 5753 ha of Si Paul Subterranean River National Park, and
1,33 m ha of El Nido National M.n me Park. This gives a PV of land of 9.86 m.ha,
Focus on Adiingilra and Mai-o|rjy reserves at 31.160 ha and 60,150 ha
respectively. This gives a PV of 'I7'l,000 ha.
Covers four reserve areas; Zahamena. Midong/-Sud, Manongarivo and
Nam oroko.
Covers Kafue Flats and Bangweulu wetlands.
Oban park, protecting 250,000 ha o r 1.84 m ha in PV terms. See Ruilenbeek
(1992).
Source; Ruilenbeek ( 1992) and Pearce e l al ( I 992c)
im plied valuations in existing international conservation schem es. T his
is particularly relevant to debi-Jor-nature swaps where secondary debt is
bought by a conservationist concern and then traded with the host
governm ent for a d om estic currency liability and a conservation
package. T h e box above show s ilic results o f translating the sum s paid
in a num ber o f dcbt-for-nalurc swaps into ‘per hectare’ values. T h e
figures show n appear to be very sm all, perhaps a few dollars per hectare
.o f land. It has to be rem em bered that dcbt-for-nature swaps do not
‘purchase’ land as such but secure rights to conserve the land, or operate
on it in a sustainable manner, As .sucJj, the prices show n arc not marketclearing prices. A lso im portant is the fact that the sum s paid understate
true w illingness to pay. T h e 6w;ips arc managed by a few conservation
bodies and governm ents. T lic resulting deals do not necessarily reflect
what w ould happen if wider populations were to engage in the process
o f expressing their w illingness to pay. N on eth eless, debt-for-naturc
swaps are (so far) th e only way in w hich we have secured estim ates o f
what m ight be existence value. Actually carrying out a contingent
valuation exercise o f the N o rth ’s w illingness to pay for environm ental
68 ■ Economic values and ihe natural world
assets in the Souili would be anotlicr way of achieving this goal, and
such exercises arc planned.
M ore explicit valuations of protected areas arc comparatively few in
developing countries. An exercise in Kliao Yai national park near
Bangkok in Thailand suggested rccrcailonal benefits of sonic 10-25
million baht pcryear, and possible ‘existence’ benefits of more than 120
million balit per year. These might be compared to management costs
and forgone farm income of about 30 million baht. Provided existence
values can be ‘captured’, eg through raising entrance charges to the
park, the analysis suggests a high return to conservation. Similar
analysis of a wildlife sanctuary in Kliao Sol Dao, Thailand, where
tourism is not encouraged, produced a scries o f ‘indeterminate’ values
which, in principle, could be estimated with further data and resources.
Valuing th e ecological fu n ctio fts o f w etlan ds
The world’s wetlands are under threat from agricultural, residential and
industrial development, and from pollution. Wetlands comprise areas
of marsh, fens, mangroves, and other wet areas usually, but not always,
at the interface between aquatic and terrestrial environments. They
account for some 6% of the global land area. They are especially fragile
ecosystems because they arc ‘open’ and arc fed by river systems which
are themselves subject to pollution and man-made changes in flow.
Because their economic functions have been so poorly understood, they
also tend to be regarded as being relatively unimportant. But there is
now a wider appreciation that wetland,s are multifunctional and that
many of the unpriced functions arc economically important (sec
Table 12).
Table 13 shows some estimates of the economic values of wetlands.
By themselves they arc of little interest, apart from showing that
wetlands do have economic value and the value is not negligible. Of
more relevance is the relalionship between these economic values and
the values of the alternative use of the wetlands. It is often assumed that
water feeding a wetland is not serving a useful function when in fact, as
Table 13 shows, natural wetlands serve a num ber of direct economic
' functions such as supporting agriculture and fisheries. Proposals to
drain wetlands by diverting water resources to, say, irrigation of
adjacent areas or to reclaim the wetland soils should therefore be
debited with the forgone benefits of the natural system. In the case of
the Hadeja-Jama’are floodplains of northern Nigeria it has been
Valuation in practice • 69
T a b le 12 The ecoloi;ical functions o f w clh n ds
W elland Types
W elland Functions/Services
a) Inland freshwater marshes
I ) (.1 . b, e, f, g) Nutrient cycling and storage:
resulting in potential water quality improvement
b) Inland saline marshes
2} (. 1, c, c, f, g) Potentr,tl aquifer o r groundwater
storage and recharge function
c ) Bogs
3) (all except perhaps d) Provision of a delay
met fianism for the release of flood waters: storm
jx'oicction from tidal surges and winds
d) Tundra
'I) la, b, g. h, i, j) Shoreline anchoring (coastal and
rtvi’t me) providing a buffer against erosion
e) Shrub swamp
5) (all) Ameliorating influences on local
microclimates and a possible biospherical
stabilisation role, carbon sinks etc
f) W ooded swamp
6 ) (all to varying degrees) Food web support
(local and extended)
g)
7) (all to varying degrees) commercial outputs:
fsft. furs, limber, wildfowl, peat fuel, reed, lowintensity gracing
h)
i)
j)
W e i meadows, botlomlands
and other riparian habitats
Coastal salt marshes
Mangrove swamps
0) (all to varying degrees) Recreational
opportunities
9) (all to varying degrees) O ther, eg wildlife
habitats, landscape assets; non-use values likely to
be very significant for unique high-rank order
well.rnds
Tidal freshwater mai shes
Source: Turner. K and Jones. T ( I 9 9 1) W cih in d s:M arket and Infer vcniron Faiiures - Four C ose
Studies Eart/iscan, London
possib le to show that even a p a rtia l valuation o f natural functions
reveals the superiority o f the svctJand as an agricuJluraJ, fishery arxi
fueJwtxxI su p p ly system com pared to tlie alternative o f dam m ing feeder
rivers. A useful w ay o f presenting such findings is in term s o f the net
econom ic value per cubic metre o f water supplied to the wetland
system . In the H adcja-Jam a’are case the resulting com parison show ed
70 ■ Economic values and the natural world
Table 13 dconomk values for wellands funciicns
Valuation
Area
S o u rc e o f value
Louisiana
Com m ercial fishciy
f ur Trapping
; (0
Louisiana
(1' per ac
400
190
Recreation
Storm protection
57
?'100
Total
3047
Recreation
103
( 2)
Charles
River, Mass
Recreation
W a te r supply
3400
80000
(J)
Hadeyia-Jama’are
Floodplain,
Nigeria
('<)
Mangrove:
Trinidad
Agriculture
1ishing
Fuel w ood
T otal
Mainly fisheries
41
15
7
63
15000
(5)
Fiji
I 1000
(5)
Puerto Rico
13000
N otes and sources
All reported valuations have been converted to 1990 prices and lo 8% discount rates.
I. Costanaa, R, Farber, S and Maxwell, j ( 1909} Valuation and Management oF W etland
Ecosystems' Fcologkal E c o i i o k i k s . v o I I. no '1. I T ’ccm bcr, pp 335-362
2. Bergstrom, ], SloK, /, T ilre , J and W right. V [1990) ‘Econom ic Value o f W ctlands-Based
Recreation' Ecological Econom ics, vol 2, no 2, June, pp 129- 148
3. Thibodeau. F and O stro . B ( 1981) 'An Econom ic Analysis of W ellan d P ro lecW o n Jou rnal
o fEn viro n m en la lM o n a g em cn i v o l 12.n o l,/an u ,iry
Barbier, E. Adams. W and Kimmage, K ( I 99 I} Er ononiic valuation o f W etland Benefits: the
H adejia-Jaitio are hloodirlciui, Nigericj London L iivironm enial Econom ics C e n tre , Paper
91-02, London
5
Handbook for M angrove A rea M anagem enl. Section IV.
Valuation in practice ■ 71
net benefits of $45 per lOOOin’ oI water flow for the natural system, but
only 4 cents per lOOOin’ for an existing diversion of water tlirough the
building o f a dam. A similar analysis o f Ichkcul National Park in
Tunisia, also tiirealcned by dams, showed fislicry and grazing benefits
o f $134 per lOOOiii’ of water com pared to negative returns for the
diversionary use (see Thom as ct al, 1990). It cannot always be assumed
that there is profit in nature, nor that, when there is, it will exceed m anm ade aJtcniativcs, but tlic evidence is sufficient to show that the
alternative mistake of assuming that natural systems have low economic
value is a serious one.
V a lu in g p r e f e r e n c e s f o r p e a c e a n d q u ie t
Noise nuisance afflicts all societies in the workplace and in the open
where the main causes arc traffic noise and, in the richer world, aircraft
noise. A ttem pts to value people’s preferences for peace and quiet have
centred on the use o f the hedonic price approach (see A ppendix II)
w hereby an analysis is made ol' the determ inants of house prices, A
residential property price will vary with the characteristics of the
property - its location, size, neighbourhood, nearness to the business
district and shopping, and so on. In this way the house is seen more as
a ‘bundle o f attrib u tes’ rather than bricks and m ortar. By statistically
analysing the prices of different properties according to tlicir attributes
it is possible to separate out the factors influencing prices, factors that
will include the local noise level. Table 14 shows the results o f various
studies of the relationship between noise levels and house prices. T hey
arc presented in term s of a ‘price elasticity’, ic for each unit change in
the noise level, measured in standard noise units, the percentage change
in property price is shown. For aircraft noise the estimates suggest that
for every unit change in N E F (noise exposure forecast) property prices
might change by around 1%, and for every unit cliangc in N N I (noise
and n u m b er index) tlic cliangc is around 0.5%. For traffic noise,
m easured in L cq (equivalent coiuinuous sound level), a one unit change
again produces property price depredation of 0.5-1.0%, Clearly, using
property price changes to measure preferences for reducing noise
nuisance docs not encompass all the benefits of noise reduction. H igh
and continuous levels of noise arc probably associated with health
im pairm ent ihrougli stress, for example. It is unlikely that individuals
will be sufficiently aware of hcaltli risks to ‘capture’ their value in the
form o f house location choice. Nunc the less, the hedonic property price
72 ■ Economic values and the natural world
T a b le 14 Hic economic value o f f educing noise nuisance
Impact of 1 Unit Change in
NEE
NNI
Study
A IR C R A FT NOISE
USA
Los Angeles
Englewood
New York
Minneapolis
San Francisco
Boston
Washington DC
Dallas
Rochester
0.8
0,8
■
1.6-2.0
O.fi
0.5
o.e
1.0
0.6-0.8
0.6-0.7
Canada
Toronto
Edmonton
0.2-0.6
0.1-1.6
UK
0.2-0.3
0.0
Fleathrow
Manchester
Australia
Sydney
0.0-0.4
Switzerland
0.2
Basel
Netherlands
0.3-0.5
Amsterdam
Norway
I.O (p e rd li)
Bode
Average:
0.6-1.3
T R A FFIC NOISE
Leq
USA
N Virginia
Tidewater
N Springfield
Towson
Washington DC
Kingsgate
North King County
0.1
0.1
0.2-0.5
0.5
0.9
0,5
0,3
0.2-0.5
Vtiluadon in practice - 73
Spokane
Chicago
0.1
0./
Canada
Toro nlo
1.0
Switzerland
Basel
(.3
Norway
Oslo
AV ERA G E
0.0
,
0.',
Sources.- O E C D (1909) Enviro/jjiicniu/ r.ihcy Oenc/its.' Monetary ValuoUon O E C D . Paris;
Nelson, f (I9 6 0 ) ‘Airpor-ts and Pro]3ert>^ Values: a Survey of Recent Evidence'yournol of
Troniport Economics and Policy. X IV . pp 37-39; Nelson. J ( 19G2)'Highway Noise and Property
Values: a Survey of Recent Evidence' journal of Tronspon Economics artd Policy. X V I. pp
117- I 30; Navrud, S ( 19 9 1) 'Norway' in Bai de. JPh and Pearce. D W . Voluiitg the Environment
Earthscan. London
approach offers a reasonable approach to the valuation of the dominant
benefit of noise reduction - reduced irritation and nuisance.
V a lu in g p r e fe r e n c e s f o r u n iq u e h a b ita t
The ‘existence’ value component of total economic value can be
importantj particularly where the object of valuation is unique (as with
the G rand Canyon or a cultural building) or, if not unique, the subject
of extensive familiarity to people some distance from the asset. TTie
Kakadu Conservation Zone in northern Australia is a 50km square zone
surrounded by the 20,000km square Kakadu National Park. The Park
is visited by over 200,000 people every year and has outstanding
scenery, wildlife, wetlands and Aboriginal archaeological sites. Mining
operations threatened to disrupt the Conservation Zone. Australia’s
Resource Assessment Commission therefore determined Co elicit
economic values for the Zone in order to compare them to the benefits
of mining development. The approach used was contingent valuation
(sec Appendix 2) whereby respondents arc asked Co complete a
questionnaire which includes questions about willingness to pay to
conserve the area. Tlic resulting 'm arket' is hypothetical and hence the
problem with this method is to lest for ‘hypothetical bias’, ic the extent
74 ■ Economic values a n d die natural world
■
to whicli answers given to liypothctical questions woiikl be borne out if
there was a ‘real’ market in conservation. I’art of this bias-niininiisation
process involves asking ‘discrete d io icc’ questions in which respond­
ents answer yes or no to a specified qucsuon about willingness to pay,
rather than answering questions about what their willingness to pay is.
The Kakadu valuation jiroduccd the following results;
I
T y p e o f M illin g
V u lu atio ii; $ A /y e a r f o r 10 y e a rs
Im p act
Naiional sample
Northern Territory
sample
M ajor
124-143
M inor
53-80
7-35
14-33
with the analysts sliowing a preference for tlic lower end o f the range,
so that valuations are some $A 50-120 per year for the national sample,
according to wliethcr the mining development would have a m inor or
major im pact, and $7-14 for the m inor impact. Extrapolated to the
wJiolc Australian populaiioji the total willingness to pay to conserve the
area against mining ranges from $650 million to $1750 million, greatly
in excess of the net benefits from mining (sec Im bcr et al, 1991).
Contingent valuation is controversial partly because of its use of
‘hypotlietical questions’, but also because it is the only valuation
ted m iq u e capable of capturing the option and existence value compo­
nents of total economic value. N o attctiipt was made in the Kakadu
study to separate out the com ponent pan s of value, but it is d e a r that
m uch of the stated willingness to pay was made on behalf o f people wlio
were very unlikely to visit the area. How far the valuations recorded
would be validated if there was a real market in cojiscrvation o f the
Kakadu Conservation Zone is unknown, Tlicrc arc sonic reasons for
supposing that so-callcd ‘framing bias’ arises in highly targeted
valuation studies of this kind; individuafs stale a willingness to pay for
a single purpose without reference to the many alternative uses o f the
money they say they arc willing to pay. Some commentators feel that
fram ing bias is particularly relevant wlicn it comes to valuing
endangered species.
V a lu in g p r e f e r e n c e s / o r th e c o n s e r v a tio n o f e n d a n g e r e d
s p e c ie s
Contingent valuation techniques currently provide the only available
Valuaiion in practice ■ 75
technique for eliciting preference valuations for environmental assets
that have no related market. lindangcred species provide one such
example. The problem with the contingent valuation method (CVM) is
that because the market is created experimentally - through the use of
interviews and questionnaires - there is no obvious way to validate the
estimated willingness to pay (W IT ) for conservation. A great deal of
the CVM literature is ihcrclotc concerned with procedures for
validation (sec Appendix II). Brttadly speaking, validation tests include
(a) checking the CVM results against other valuation techniques
(usually the travel cost method - see Appendix II), (b) checking for
biases in responses to the questionnaire, and (c) checking, where
possible, against actual markct-i cvcalcd willingness to pay.
One virtue of the CVM approach is that it alone can capture
‘existence’ and ‘option’ values. All other valuation techniques focus on
use values. Table 15 shows the results of CVM studies for endangered
or rare species, and highly valuctl ecosystems. The various estimates
have been converted to per person W TP in 1990 prices. The data are
interesting because o f their broad consistency. Valuations o f preferen­
ces for species conservation, for example, cluster around 19 if the
relatively high value for liumpback whales is excluded, and $13 if they
are included. The range is $1-18 excluding humpback whales and
$1-48 including humpback, whales (sec note in Table 15). F o r prized
habitat the range is $9-107 per person per year. While a great deal more
work is needed in this area, the results arc suggestive in that (a) they are
not large proportions of respondent income, and (b) habitat appears
more highly valued than species which, given the role that habitat
conservation would play in species conservation, is the difference one
would expect; a wider array of benefits is being secured through
conservation of liabitat than llnuugh targeting species.
One problem area is clearly fcaining bias. T he sum of tlic species
valuations in the USA, for example, is much higher than average
personal contributions to consci vation societies, although the latter
may reflect ‘free rider’ phenomena (many who value the environment
do not pay bccau.sc others pay). The international comparison of per
capita values is also problematic. There arc no particular reasons to
suppose that ‘unit values’ of iliis kind would be the same between
countries or evctt between different regions of the same country. But
where there arc reasons to suppo.sc that environmental awareness is on
approximately the same scale - wliieh is testable through opinion polls
- then, allowing for variations iti income, one miglit expect similar
76 ■ Economic values and die natural world
T a b le 15 Preference vahialions for endonyrred species and p rized habitats
Country
N orway
U SA
USA
Species or habitat
brown bc.ir. wolf
and wolverine
bald eagle
emerald sliiner
grizzly bc.rr
bigltorn sliL'Cp
whooping crane
blue whale
bottlenosr dolphin
California sea otter
northern elephant seal
humpback wiiales'
Grand Canyon (visibility)
Colorado wilderness
Valuation (1990 US$/year/person)
IS.O
12.4
4.5
10.5
0.6
1.2
9.3
7.0
ai
0.1
40-40 (without information)
49-64 (with information)
27.0
9.3-21.2
Auslralia
UK
Norway
Nadgee Nature Reserve,
.N S W
Kakadu Conservation
Zone, NT^
nature reserves*
conservation of
rivers ag.iinsl
hydroelectric
development
28.1
40.0 (minor damage)
93.0 (m ajor damage)
40.0 (‘experts' only)
59.0-107.0
Notes: ( I ) respondents divided into two groups one of w^hidi was given video information;
(2 )'tw o scenarios of mining development damage were given lo respondents: (3 ) survey of
informed individuals only
Sources
Norway: Dahle, L et al (1987) ’A iiiiudes Towards and Willingness to pay For Drown Bear,
W olverine and W o lf in Norway' Department o f Foi est Economics, Agricultural University
o f Norway, Report 5 (in Norwegian); Hervik, A el al ( 1986) 'Implicit Costs and Willingness
to Pay for Development of W ater Resources' in A Carlsen (ed) Proceedings o f UN ESC O
Symposium on Decision M aking in W ater Resources Phnning Nay, Oslo
USA: Boyle, K and Bishop, R ( 1985) 'The Total Value of Wildlife Resources; Conceptual and
Empirical Issues' Paper presented to Association of Environmental and Resourci
Economists. Boulder, May: Brookshire, D et al (1983) 'Estimating Option Prices am
Existence Values for W ildlife Resources' Land Econoniics 59; Stoll, R and Johnson, L ( 1984
'Concepts of Value. Non-market Valuation, and the Case of the Whooping Crane'
Valuation in practice
•
77
Deparlm enl o f Agricullural Economics, I cxas A&M University; Hageman, R ( 1985) 'Valuing
Marine Mammal Populations: Benefit Valuations in a Multi-Species Ecosystem' National
Marine Fisheries Service, Southwest Fi-.ticries Center, Report LJ-05-22, La Jolla. California;
Samples. K et al (1 986) 'Information D u d o s u re and Endangered Species Valuation' Land
Economics, vol 62. no 3; Schulze, W el .il (1983) 'Economic Benefits of Preserving Visibility
in the National Parklands of the So'uihwesl' N oiurat Resources jo u rn a l 23: Walsh, R et al
( I 984} 'Valuing Option, Existence and Bequest Demands for W ilderness' Land Economics, vol
60, no I
Australia: Imber, D c t a l( l 9 9 ! ) A Contingivit Valuation Survey o f ihe Kakadu Conservation Zone
Resource Assessment Commission, Ri-.r arch Paper N o 3, Canberra, February; Dennett, J
(1982) 'Using Direct Questioning to V.iluc Existence Benefits of Preserved Natural Areas’
School o f Business Studies, Darling Downs Institute of Education, Toowoomba
United Kingdom: W illis, K and Benson. ) ( 1986) 'Valuation of W ildlife: A Case Study on the
Upper Teesdalo Site of Special ScK-niific Interest and Comparison o f Methods in
Environmental Econom ics’ in R K Turner (ed) Sustainuble Environmental Managemenl
Belhaven Press. London
valuations. As yet little work Ims been done to test this ‘transferability’
o f values.
W illin g n e s s to p a y f o r r u r a l w a te r s u p p lie s
Valuation techn iqu es have also been applied lo the m ore im m ediate
hum an environm ent - notably water supply and sanitation. Tradition­
ally, water supp ly investm ents liavc been evaluated by rules o f thum b
related to assum ed w illingness to pay for basic services. Since the
service is usually supplied to the poor, the assum ption has been that
only the m ost basic provision - public taps and hand pum ps - is
warranted. N o -o n e is willing to pay for better, more elaborate services.
T h is ‘basic n e e d s’ philosophy w ould be satisfactory i f the resulting
p u b lic supplies were reliable. Hut perhaps one in four pu b lic supply
system s are not working at any one point o f tim e, w hile use rates o f
those that do work are low ~ only one-third o f people connected to
public supp ly system s in Cote d ’Ivoire and K enya actually use them . Y et the benefits o f such system s in term s o f public health and tim e
saving are clearly substantial. Jlo u seh o ld s’ true w illingness to pay is
therefore worth estim ating.
In the absence o f real markets in w hich price varies, the challenge is
to find the underlying demand for the service. In term s o f lim e saving
one approach is lo observe how people choose betw een alternative
sources o f supply. In U kundu, K enya villagers could choose betw een
water from vendors w h o visit the h ouse, water sold at ‘kiosks’ in the
T8 ■ Economic values and the naU ind world
village, and water from the well (see M u ct al, 1989), In term s of
collection time, relative to use o f the well, house delivery saves the most
collection time and collecting from wells the least am ount of time. In
term s o f expenditure, household vending costs the most, then kiosk
water, with well water being the cheapest. By looking at actual choices,
the trade-off between money and time can be determ ined. Tim e saving
; is one of the benefits o f water supply inijnovcm cnt. In this case, if water
quality is invariant between sources, time savings will generally define
total benefits. T he U kundu study found that users of vendors and
kiosks were revealing higli W T P for time savings, of the order o f 8% of
incomes.
A study in Brazil used the contingent valuation approach (see
Appendix II) which essentially involves asking people citlier directly
w hat they are willing lo pay, or less directly what their choice would be
if they were faced with certain prices for the service in qucstioit (sec
Briscoe et al, 1990). In the Brazilian sLutly, the question took the form
T f you arc required to pay X, would you connect to the new supply or
use an alternative supply?’. Three different areas were surveyed, some
with improved services available, to which households m ight or might
not be connected, and sonic without. In the ‘w ithout’ cases some had
services planned with an announced tariff, others expected a service but
did not know o f what kind or what the tariff would be. From the survey
the probabilities of being connected were estimated, and these were
found to behave as predicted. T he higlicr the price and the greater the
distance to the source, the less likely was connection. W T P estimates
were also obtained from the questionnaires. T he results provide not just
an estim ate of the average W TP, but also indicate how households
would respond to higher prices, an im portant consideration if revenueraising is a concern. M axim um W TP for a yard tap was around 2.5
times the prevailing tariff and some 2.3% o f family income. Some
‘strategic bias’ - deliberate under-reporting o f W T P - was probably
present (see Appendix II) so that true W T P was probably higher than
this. Equity considerations could be taken care of by providing
relatively highly priced services to the better off and using revenues to
cross-subsidisc the needs of the poor for free public taps.
T h e b e n e f i t s o f i m p r o v e d s a n ita tio n
Sanitation needs in developing countries will become a greater and
greater burden on public revenues as urban populations grow rapidly.
Valuation in practice ■ 79
Less than 300 niilliun people lived iti developing country urban areas in
1950. Today the figure is over 1300 million. By 2000 it will be 1.9
billion. By the year 2000 there will be 200 cidc.s with populations over
1 million people, of which 150 will be in developing countries. The cost
of the necessary infrastructure foi' this urban development is enormous.
As with water supply generally, sanitation systems tend to be primitive
for the poor and subsidised systems of the less primitive schemes tend
to benefit the middle and upper income classes. And as with water,
willingness to pay is generally asstoncd rather than estimated. Charges
above 3% of household incomes arc thought not to be affordable.
In Kumasi, Ghana, W TP was estimated tlirough a contingent
valuation approach. The options were water closets with a piped
sewerage system and ventilated pit latrines (‘K V IPs’). The latter
represent a far cheaper option for sanitation than connecting sewers and
installing water closets. Households varied according to the systems
already in place. Sonic liad water connections and could therefore be
asked their W T P for a water closet and a KVIP. Households with water
closets could be asked how much they would be willing to pay for a
connection to the scwcr, and so on. ICVlPs can operate without water
connections. The results showed that households without water closets
were willing to pay rouglily the same sum for a W C or a KVIP. In terms
of W TP for K V IPs, households with bucket latrines bid the lowest
price; those using public latrines bid significantly higher prices (around
30-35% more), reflecting the inconvenience and lack of privacy of the
public systems. Overall mean bids of around 31,5 per month compare
to average existing expenditures of about $0.5 per month. Comparing
W T P with the costs of provision of KVIPs and WCs, W TP was found
to be less than costs of supply. Given that sanitation systems yield
extensive external benefits in tlie form of public health, a subsidy would
probably be justified (the benefits of improved health were not
estimated). T he study showed that the required subsidy for a WC
system for Kumasi would amount to some $60 million. The required
overall subsidy for the K V IP sy.sicm would amount to some $4 million
(see W liittington et al, 1991).
V a lu in g th e b e n e fits o f f t i e h v o o d p la n tin g
In the developing world wood still accounts for the major part of energy
consumption. Planting trees for fuel wood is thus an inherently valuable
activity, but how valuable? Since much fuclwood is collected rather
80 ■ Economic values and llic natural world
lhan purchased in the niai kclplacc there arc no market prices at wliidi
(o value the ctuiunodity. Moreover, growing trees yield benefits besides
fuelwood. Trees provide poles for building, leaves for fodder, protec­
tion for crops, and so on. Economic valuation tcclmiques arc therefore
essential if the benefits of investing in tree growing arc to be
demonstrated. Typical approaches to valuing fuelwood benefits involve
estimating what other source of energy would be used if increased
fuelwood is not available. This might involve supplies of kerosene, coal
if available, and cow dung. If it is kerosene or coal then market prices
arc available. Cow dung may also be marketed but this will typically be
the case where fuelwood is also marketed, ie in conditions of
considerable scarcity, so that fuclwood market prices are tlicn available.
The value of cow dung can be estimated by looking at the responsive­
ness of crops to cow dung as a fertiliser and soil conditioner. The market
value of the crops then provides the relevant link to the world of market
values. Care has to be taken that the predicted substitution is credible.
In Korea some fuelwood investments liavc been justified on the basis
tliat the alternative fuel would be coal. In the event, the fuelwood did
not displace coal. Kathcr, coal displaced fuclwood in rural areas. As
with all project appraisal, predicting tastes and preferences can be
hazardous.
The valuation of fuelwood hy comparison with cow dung can be
estimated as follows. First, find the energy content of fuelwood and
dung. Second, estimate the weight of fuclwood in a cubic metre. Third,
compute the ‘dung equivalent’ of I cubic metre of fuelwood by
multiplying tlic weight by the ratio of the energy values of fuel wood and
dung. Fourth, estimate the amount of inanure that a given amount of
dung produces, so that tJie cubic metre of fuclwood can now be
expressed in ‘manure equivalent’. Fifth, estimate the crop yield
response to this amount of manure and the monetary value of this yield
increase. Sixth, normalise the value of the yield increase per cubic metre
of fuclwood; this is then the economic value, or shadow price, of the
fuclwood.
.
The steps in this process arc not complex but the validity of the final
result is crucially dependent upon the crop yield response estimates. As
witli so much economic valuation il is not the economic stages in the
process that give rise to the problem, but the underlying ‘production
function’, ie the links between the environmental variable and the
' 1. o
1
.1...
,1,,, ‘rl>iiirT_,.riniva|enr’
■
Valuaiiott in practice ■ 81
estim ating soil erosion damage. Sometimes the costs and benefits arc
estim ated in term s of the chonicu! equivalents. For example, instead of
the ‘m anure’ equivalent, it is possible to estimate the am ount of
commercial fertiliser that woultl have to be used to compensate for cow
dung diverted from use as a man m e to use as a fuel because of fuelwood
scarcity. This was the appioacli used in a W orld Bank study of
afforestation in Ethiopia (sec Ncwcombc, 1989). Such approaclies do
not capture all tlic benefits of fuelwood since tiic chemical nutrient
status o f dung is only part o f its value as a manure. None the less, the
procedure reveals that environmental costs and benefits invariably do
have an analogue somewhere in tlic private market system. The
challenge for valuation is to make that link and translate the market
values back to tiic environmental asset.
Fuelw ood investm ent yields other benefits too. Tlic closer proximity
o f the wood to tJic point of use means that valuable labour time is saved.
Past studies have typically valued the saved time at the ruling wage rate
if there is no surplus labour, and at the m inim um wage where tlicrc is
surplus labour. Strictly, neither approach is correct in term s o f the
criterion o f willingness to pay. Rather the requirem ent is for some
valuation based on actual choices, as with the U kundu study above.
Trees also provide leaf fodder for animals and this is often included in
project evaluations. Again, if ibddcr is not actually marketed, a
‘production function’ link can be made to marketed outputs by
estim ating the effects of incrcasc(.l fodder on livestock wcigiit and hence
the m arket value of livestock. Care iias to be taken to apply the ‘w ith’
and ‘w ith o u t’ principle. If trees arc grown especially for fodder, then
the loss of o utput from the existing use of the land has to be deducted.
Grass yields forgone, for example, would be deducted from tree fodder
yields.
Trees as inhibitors o f ‘desert II ication’ may also be im portant, where
desertification needs to be construed as general land degradation rather
than the more popular and unw arranted concept o f ‘spreading deserts’.
The idea is that any tree pianiitig tends to reduce pressure on naturally
forested land. One approach to value the gains is to estimate the
fuelwood yield from plantations (X) and compare it to yields from the
natural forest areas (Y). Eacli hectare of plantation can then be said to
‘save’ X /Y hectares o f natural forest land. M onetising the ‘avoided
damage’ m ight then take place by projecting tlte rate of soil erosion on
tiie natural forest land so that, after some threshold year, all crop and
livestock production from that land would be lost. By calculating the
8 2 ■ Ecoiio/iiic values and the natuns} w o ilJ
present value of lost output, a sunop.ate value for the bcncfils of
planting trees is obtained.
T he fuelwood valuation issue reveals several important lessons. First,
valuation is possible. Second, the underlying ecological iiitcrlinkages
are the vital element in the valuation process. T he higliest rewards arc
likely to be obtained from expanding our knowledge o f these intcr1 dependencies. T hird, it is essential to look at all potential benefits. In
the event some may lurti out not to be im portant, but the fodder and
anli-dcscrtification examples show that .some of the ‘incidental’ benefits
could be significant.
V a lu in g th e b e n e f i t s o f b io lo g ic a l d iv e r s ity
Probably the greatest challenge to economic valuers is to derive some
values for people’s preferences for biological diversity. ‘Biodiversity’ is
frequently used as a shorthand for both ibc quantity and the range of
species, and equally frequently as a catch-all pJirasc for wildlife and
habitat. Strictly, biodiversity refers to all species of plants, animals and
micro-organisms and the ecosystems and ecological processes o f which
they arc part.s. Increasingly, economists arc turning llicir attention to
the issues of valuing preferences for biodiversity. Tlic example of
endangered species has already been given. T his section extends the
examples.
The A frican elephant
Kenya is visited by about 250,000 foreign adult tourists every year. The
‘safari’ is the main focus of this tourism, with around 1200 million per
year actually being spent in Kenya and perhaps twice that on the visits
overall (m uch of the income accrues lo the industry in the tourist’s
country of origin). Until a recent ban on the ivory trade, the Kenyan
elephant was disappearing very rapidly. From 65,000 elephants in 1981,
there were probably only 16,000 by the end of the 1980s. An analysis of
expenditures by tourists (tlic travel cost approach - sec Appendix II) and
a comingeni valuation approach suggested that tourists would be willing
to pay an extra $25 million pa to ensure that they saw elephants during
their slay. Points o f comparison arc that (a) this represents at least a 10%
increase in actual expenditures, and (b) it is substantially higher than
even the peak value of (largely illegal) ivory exports in 1979 at 33
million, and higher still than the csliiniUed 1988 value of only $17,000
(sec Brown and Hall, 1909). In policy tLHiis it suggests that countries
Vuluaiion in practice • 83
with significant wildlife resources and a dem and by tourists to sec them
could extract some of the ‘re n t’ tliat tourists obtain.
Birds
Few studies exist o f ilic econom ic significance o f birds. O ne Canadian
study looked at the direct benefits from recreational and other activities
associated w ith birds (Jacqucm ot and Fiiion, I987J. O ver 100,000
people w ere surveyed to see llicir actual participation in bird-related
activities and to ask their willingness to pay to participate. Fxpcnditurcs
by participants am ounted to C$ 1.9 billion (1986 C J) and increm ental
benefits (the excess o f W T P over actual costs) were som e C t 350
million. F o r all wildlife (birds anti m am m als) the total net benefit was
C I7 8 0 m illion pa. B irds th u s accounted for around 45% o f all wildliferelated activity net benefits. O f the expenditures on bird-related
activity - w hich results in direct income and em ploym ent to others h alf was accounted for by nim-consnnipiive activities (ic birdw atching).
B ird-rclatcd expenditure accoum cti for some C$2.4 billion o f Canadian
G D P , and for C$ 870 m illion o f governm ent revenues. Protection o f a .
single species often results in significant gains from recreational
viewing. C an ad a’s ‘cap istrano’ (the Pem broke swallow) was protected
in 1983, T h e m ass Hocking o f liiesc birds produces a spectacle m uch
appreciated by rccrcaiionisis, F stiinatcd net benefits, based on the
travel cost approach (A ppendix II) were some C f 0.5 m illion pa (see
C lark, 1987).
Ecolourism
T h e travel cost m ethod has been applied to the valuation that visitors
plaee on th e M on tev erd e C loud l*'oi cst Biological Reserve in Costa Rica
(Tobias and M endelsohn, 1991). T lic reserve is m ainly virgin rainforest
with' difficult access, b u t w ith a p.rowing tourist dem and. D om estic
visitors were sam plctl to find th eir area o f origin, and the distances they
had travelled were calculated. D istance was converted to currency
using an average cost per kilom etre o f US$ 0.15 per kilom etre. A
dem and function was tlicn cslimatcei linking visits to cost o f travel (the
price), population density and a m easure o f literacy in each o f the areas
of origin. T h e expected links were (a) the higlicr the cost tlic lower the
visit rate, (b) the higher the populaiion density tlie higher the visit rate
(low density populations w ould be m ore likely to liavc their own forest
areas to visit), (c) the higher the literacy (and Iicncc the higher is
perm anent incom e) the h igher will be the visit rate. T his is indeed wliat
was found. E stim ated visits were found to correspond to actual visits.
84 - Economic values and the natural world
From tiic demand function it was possible to estimate the ‘consumer
surplus’, the excess of willingncss-to-pay over the actual cost of travel.
The sum of these valuations expressed as a present value was
US$ 2.4-2.9 million for this one site, or around $35 per visit, or some
$100,000 per year. This figure excludes foreign visitors who outnum ­
bered domestic visitors by four to one in 1988. Assuming a similar per
( capita valuation, this would mean present values of 12.5-10 million, or
some $1250 per hectare. New land can be bought for $30-100 per
hectare, suggesting that expanding the reserve to allow for more
recreation would be a worthwhile investment.
The economic value o f plant-based pharmaceuticals
No-one is sure just how many spcclcs there arc. A probable num ber for
higher plant species, which are widely used as bases for pharmaceutical
drugs, is some 500,000, counting known and unknown species. Rates of
extinction arc positive but again unknown. Perhaps 10% or more of
these species will be extinct by the Qiid of the century. O f ail the higher
plant species, 65-75% arc indigenous to tropical moi.st forests. Hence
loss of rainforest means losing potential sources of future pharmaceut­
icals. Actual, existing, sources arc likely to be protected through
replication and synthesising of materials. What is the economic value of
these plants? Valuation to date lias been fairly speculative but
illustrative of the orders of magnitude involved. Valuation can be
approached by looking at;
1 the actual market value of the plants when traded;
2 the market value of the drugs of wliich they arc the source material;
and
3 the value o f the drugs in terms of dicir life-saving properties, and
using a value of a ‘statistical life’.
If we do not take into account the prevailing institutional capability to
capture the values in discoveries as implied in 2 and 3, the result will be
exaggerated valuations for the host country. As Kuilcnbcck (1992)
notes, tlie economics of invention reveals that income realised by
inventors is considerably less than the ultimate value to society of tlie
product, because the traits associated with the ultimate products have
a very low degree of appropriability. This is true with respect to the
countries providing niches to the diverse flora and fauna where the
discoveries have to be made. This aberration in rent appropriation
becomes even more blurred when the assumptions of ignorance,
Valuation in practice ■ 85
uncertainty, essentiality, and substitutability about medicinal plants
enter the analysis. This implies that a factor representing the institu­
tional framework should be applied to the ex-post discovery valuation.
This factor will depend on the existence of the licensing structure in the
host countries; whether research conducted in the host country causes
other leakages in the economy; and wliether the ability exists domesti­
cally to carry out the research. Thus this factor is expected to be low in
tropical low income economics. In Ruitenbcck’s terms;
■
CPV = a . EPV
where CPV is capturablc production value and EPV is expected
production value, ic the patent value of one discovery. The fact that a
tends to be low explains why developing nations feel that the benefit of
tlicir efforts to conserve biodiversity is captured more by others. That
is, a, can be thouglit of as a ‘coefficient of rent capture’. One purpose of
the 1992 Rio Biodiversity Convention is to raise the value of a.
The approach used here is fraught with difficulties given the
considerable data deficiencies, but it is worth pursuing.
For any given area, say a heeturc, there will be some probability, p,
that the biodiversity ‘supported’ by that land will yield a successful
drug D. L et the value of this drug be V|(D), wiicre subscript i indicates
one of two ways of estimating the value: the market price of the drug on
the world market (i = 1), or the ‘shadow’ value of the drug which is
determined by the num ber of lives tliat the drug saves and tlic value of
a statistical life (i = 2). Since tlici L- arc many other factors of production
producing value in the drug, let r be the royalty that could be
commanded if the host country could capture all the royalty value.
Finally, let a be tlic coclTicicnt of rent capture discussed previously.
Then, the medicinal plant value of a hectare o f ‘biodiversity land’ is:
V„,,,(L) = p . r . a . V,(D)
Wc will now consider cacli element of this equation in turn.
T h e p r o b a b ility o f success: Principe (1989) estimates that the
probability of any given plant species giving rise to a successful drug is
between 1 in 10,000 and 1 in 1000. These estimates arc based on
discussions with drug company experts. Estimates of tlie num ber o f
plant species likely to be extinct in the next 50 years or so vary, but a
figure of 60,000 is widely quoted. This suggests that somewhere
between 0 and 60 of these species could have significant drug values.
Put anotlicr way, if biodiversity use was favoured over alternative land
86 • Economic values and ihe natural world
uses, tlic realised benefit as far as m edicinal drugs arc concerned would
be the econom ic value o f these 6 -6 0 species.
T h e r o y a lty ; based on the observation that existing royalty
agreements involve royalties o f 5-20% , but with a low figure for drug
developm ent som e way into the future, we adopt a value o f r = 0.05.
R e n t c a p tu r e : if host countries could capture rents perfectly then
I a = 1. Ruitcnbeek (1992) suggests that rent capture is likely to be as low
as 10% in low incom e countries. H ence a range for a is a = 0.1 to 1.0.
T h e v a lu e o f d r u g s; Tabic 16 sum m arises som e estim ates o f the
value o f successful drugs. T h e m ethod o f valuation is important because
it affects tJic size o f the estim ate sigtiil icantJy. T h e valuation based oii
life-saving properties gives the highest values, using the value o f a
T a b le 16 The economic value o f plant-based drugs
USA
Market value of trade
in medicinal plants
5,7
(1900)
Market or fixed value of
plant-based drugs on
prescription
11.7
(1985)
15.5
(1990)
Market value of
prescription and overthe-counter plant-based
drugs
Value of plant-based
drugs based on avoided
deaths:
anti-cancer only
+non cancers
O ECD
(Ifillion $ 1990 prices)
( 1981)
24.4?
(1900)
35.1
(1985)
49.0?
(1985)
I9.B
59,4
(1985)
(1985)
Q4.3?
(1905)
20.0
240,0
. (I9 8 S )
17,2
W o rld
360.0
720.0
(1905)
Notes: Bracketed years are iMosc for which v.ikuT, aie estimated, fbuio of O E C D to USA
taken to be 1 'Value of a statistical life' taken to be 1>'l million in 1990 prices. Lives saved taken
to be 29,500-37,500 pa in USA. A verage is taken here, ie 30,000. Multij?!)' O E C D by 1.4 to
get to world estimates.
Source: adapted with modifications from Principe ( 1989)
Valuation in practice ■ 8 7
‘slaLtstical life’ of $4 iiiiJlion (I’carcc, Barm and Gcorgiou, 1992).
M arket values of jilanl-bascd ilnigs give lower values, and the actual
traded price of the plant niaicrial, the lowest value of all. T he price o f
drugs reflects, o f course, many more things than the cost of the plant
source material. In that respect, the drug price grossly overstates the
value o f the plant. Equally, inarkci prices understate true willingness to
pay for drugs: there will be iu(.livii.luals who arc willing to pay more than
the market price Jbr a given drug. Indeed, since the evidence suggests
that such drugs tend to be price inelastic, tltis ‘consum er surplus’
clement could be substantial. While there is no empirical basis for
supposing that the consuntcr surplus element exactly offsets the
overstatem ent in the price csiiiiiatc, the two factors do work in opposite
directions.
In the 1980s only about 40 plant species accounted for the plantbased prescribed d rug sales iu the USA. T hus, on the basis of
prescription values only ( J’ablc 10), each species was responsible for
$11.7 biIlion/40 = $290 intJItoii, on average. Since all life-saving drugs
would be on prescription, use of ilic value of avoided deaths suggests a
value p er plant o f $240 billioii/40 = $0 billion per annum . Clearly, some
species were far more valuable lhan others, but, taking the average it is
possible lo get sonic idea o f the lost pharniacciitica! value from
disappearing species. I f there arc 00,000 spcdcs likely to be unavailable
for medical research, and the probability tliat any given plant will
produce a marketable prescription drug is 10^ lo 1 0 ihcii, taking a
m ean o f 5 x ]0-'< and applying it to the 60,000 estimated losses means
that 30 plant-based drugs will be lost from species reduction. On
m arket based figures, the annual loss to the USA alone would tlierefore
be 30 X $292 million = $8.8 billion, and to O EC D countries generally,
perhaps $25 billion. In an update, Principe (1991) suggests that USA
1990 prescription plant-based medicines had a retail value of $15.5
billion, which would raise the value per plant to $390 million. As a
benchm ark, the G N P produced in the whole of Brazilian Amazonia is
some $18 billion per annum . On the ‘value of life approach’ the annual
losses would be 30 x $6 billion = $ 180 billion for liic USA, and over $500
billion for the O E C D countries generally. However, these figures
assume that substitutes would not be forthcom ing in the event that the
plant species did become extinct.
Using the previous estimates it is possible to arrive at an estimate of
the value of a ‘representative’ hectare o f land. 'I'lic model can now be
written;
S 8 ■ Economic values a m i the tialural world
Vmp(L) = (Nii X p X r X a X
per niiiiuiii
where tlic new notation is:
Nr
n
H
=iiiiin b c r o f plant species at risk
=n u in b e r o f d ru g s based o n p lan t species
=n u m b e r o f hce’tai cs o f lan d lik d y to su p p o rt nicdicjnaJ p lan ts
i and
N r
= 60,000
p
= 1/10,000 to I/IOOO
r
= 0.05
a
=O.I to I .
V /n = 0.39 to 7.00 billion U SI
H
= 1 billion hectares, the approximate area of tropica] forest left in
the world.
The resulting range of values is from 10.01 to J21/ha. I f a = I at all
times, then the range is $0.1 to J21/ha. Clearly, the lower end of the
range is negligible, but the upper end of the range would, for a discount
rate of 5% and a long-time horizon amount to a present value of some
$420/ha.
Ruitcnbeek (1992) suggests an annual value of 185,000 (/)50,000) for
a = 1 for the K orup rainforest. The relevant area is either 126,000 ha (the
central protected area) or 426,000 ha (the central area plus the
surrounding management area), so that per hectare values would be
10.2 to $0.7 per hectare per annum, very much in keeping with the
lower end of tlie range obtained from our own model.
In a study of medicinal plant harvesting in Belize, Balick and
Mendelsohn (1992) estimate the local willingness to pay for land. Their
annual net revenues arc $19-61/ha. I hcsc values arc not directly
comparable to the cstitnalcs obtained above since they relate to local
medicinal plant use rather than the ‘global’ commercial values to tlic
O ECD countries. It is significant, however, that they just overlap the
upper range of the global values obtained above ($21 ha). Note also that
such local values would he quickly depressed if very large tracts of land
were devoted to medicinal plants, whereas the global values obtained
here would be fairly invariant with supply since the existing supply
already has many features of an open access resource.
Overall, then, despite the fortnidablc data problems and the
difficulties involved, the model used licrc docs suggest values in a range
from very low to around $20 per licctarc.
V aluaiion in practice ■ SP
T he results are speculative and a great deal more research is needed.
But the indication is clearly that the potential value of pharmaceuticals
in the developing world could be very large. N othing has been said
about substitutes; if plant source material did nut exist other substitutes
would be available. I f pharmaceutical companies thought plant source
material was so im portant why have they not purchased large tracts o f
virgin forest? In terms o f the concept of option value, however, the
indications arc that it m ight be substantial and in favour of conserving
biological diversity on at least this ground.
C o m p a r a tiv e e c o n o m ic s o f e n v ir o n m e n ta l c o n s e r v a tio n
D em onstrating the bcncfils o f conservation is an essential part of the
overall purpose o f economic valuation. Conserving biological diversity
is unlikely lo succeed unless its economic value can be shown to be
greater than the alternative laial use. Some evidence is available to
suggest that conservation in the sense o f sustainable use o f natural
resources is, in m any circumstances, to be preferred over conventional
land uses (see box on page 90). But if this is so, why isn’t the
environm ent conserved automatically through market forces? T he
reasons why evidently superior market benefits for conservation uses
are not realised in practice arc complex. But a fundamental one is that
m arket forces arc very often not allowed to work in both developing and
developed economies. A griculture, for example, is subsidised w orld­
wide, and especially in countries such as Japan, South Korea and the
E uropean Com m unity. T h e result is that conservation has to compete
not w ith the ‘tru e’ rate of return to the alternative land use but with a
distorted rate o f return, inflated by protectionist policies. T his
observation docs m uch lo explain why drawing o f biodiversity
‘conventions’, while im portant, will achieve little. T he basic require­
m ent has to be to correct and modify the economic policies that
encourage people - farmers, industrialists, ordinary citizens - not to
conserve. This issue is discussed at great length in Pcarcc and Warford
(1992).
VALUATION A N D GLOBAL ENVIRONMENTAL
PROBLEM S
Valuing the damage from global warming clearly extends economic
techniques into controversial and uncertain areas. In the first place, the
sheer scale of global environmental issues is likely to make the
9 0 ■ Economic values and i/ie naiural w otid
C O M P A R A T IV E V A L U E S O F N A T U R A L H A B IT A T U S E A N D
A G R IC U L T U R A L P R O D U C T IO N
Table I 7 shows some esUmntes o fih e cco nu niic value o faliern ative land uses
for developing countries, T h e evidence is limited but it contradicts the
presum ption that 'developm ent' is always better than 'c o n s e ™ tio n ’. If
natural resources are managed wisely, and if people are allowed to exercise
inform ed choices, conservation frequently pays in term s o f conventional
financial analysis.
Table 17 7afues o f akernalive
h n d ascs in developing countries
Country
Use of habitat
Value
(per ha)
Alternative use
Kenya
Wildlife lounsm
» >
Cattle ranching
Zimbabwe
Wildlife
production
ZM.2
Cattle ranching
Z$3.6.
Malaysia
Forest
production
$2't55
Intensive
agriculture
$217
Peru
Forest
production
$6020
Clear-fellihg
timber
$1000
Value
Source: Swanson, T (1991) '1 he Economics of Natural Habitat Utilisation: a Survey
of the Literature and Issues' London Environnimtal Economics Centre (mtfrteo)
credibility o f damage estimates suspcci. Second, some global problems
- such as global warming - may prodticc ‘non-marginal’ changes in
well-being, whereas valuation tcchnk]ucs have been developed for
cotnparativcly small or ‘marginal’ effects. N one the less there arc
several attempts to value global warming damage with the aim of
throwing light on the setting o f global warming ‘targets’, ic targets for
the reduction in greenhouse gases. Inlcrnational agreements will aim to
set some overall global target whicli will then be allocated between
countries according to sotnc ‘burden sJiaring’ formula.
Global warming damage is likely to show up in the form o f forgone
G N P and in ‘n on -G N P ’ costs. Existing studies arc for the U SA only;
extension to the world requires some assumption about transferability
Valuatioji in practice ■ 91
T a b le IB The ccononuc donwge [rom ghbal warming
Prost'nl Value (billion U5$ 1990 pa)
assuniing a doubling o f carbon dioxide equivalents
Agriculture
Forest loss
Sea level rise
Electricity requirem culs
Non electric space he.iting
Human life
Hurricanes
W a te r supply
Urban infrastructure
A ir pollution
Migration
Leisure activities
Species loss
Totals
2050
2250
17.5
3..1
7.0
95.0
11.7
-I..1
S.f!
O.li
7,0
0.1
35
0.5
1./
4.0
6 I.( ,
7.0
35.0
67.0
-4.0
33.0
6.4
56.0
06
19,8
2.8
4.0
16,0
338.6
Source: Cline. W (1991) Estinialing (be ficne/its o f Crecnin»/sc Warming Abaicm ent Paris,
O tC D
o f U S results to other econom ics. T h e results o f one study arc show n in
Tabic 18. T h e estim ated dam aye am ounts to 1.1% o f G N P . Expressed
as a ‘price’ o f a tonne o f CO j the damage estim ate is som e S9 per tonne.
T h e estim ates show n relate to damage done by doubling the
concentration o f C O 2 in llic atniosphcrc (2 x CO^), an outcom e that,
w ith ‘trends con tin u ed ’, m ight o c c u r around 2030-2050. T h e table also
show s guesstim ates for 2250 and these arc substantially above those for
2050, T h e doubling level is m erely a benchm ark. I f nothing is done by
way o f prevention, warm ing will continue. T h e 2250 estim ates in fact
correspond to a IO°C warming.
T h e estim ates in Table 18 are part o f ongoing work on the valuation
o f clim ate change effects. T h ey arc therefore provisional. But if damage
done from the dou b lin g o f CO^ concentrations am ounts to around 1%
o f gross world product, then it is not as dram atic as som e forecasters
suggest and it is an appropriate area for the application o f econ om ic
valuation techniques. Equally, the estim ates make no allowance for
dram atic change in the form ol'catastrophes etc. Finally, the estim ates
9 2 ■ Econom ic values a n d the n a tu ra l w orld
show n in T ab le \S arc present values: they have already been discounted,
in this case using a discount rate o f 1%. As noted previously, justifying
suclr low discount rates on conventional cfl icicncy grounds is probably
not possible. U sing 1% as a discount rate to reflect intergenerational
equity is p erhaps arbitrary b u t reflects ilic state o f play. A t rates of
discount above 1% llic 2250 dam age cstinialc would be considerably
reduced.
ECOLOGICAL
ECONOMICS
5
Ecological Economics 25 (1998) 3-15
i€ value o f the world’s ecosystem services and natural capitaf
Robert C o s t a n z a
M o n ic a G ra s s o
R a l p l i d ’Arge*^, R u d o l f d e G r o o t
Step hen F a r b e r * ,
B r u c e H a n n o n ^ K a r i n L i m b u r g ®, S h a h i d N a e e m
R o b e r t V . O ’N e i l l J o s e P a r u e l o h R o b e r t G . R a s k i n \
P a u l S u tto n
M a r ja n van den B e lt
'Ctiiterfor Eniironmeniat Science. Zoology Deponmeiit. Lim ersifr o f Maryland, Box 38. Solomons, MD 2068S, USA
^ InsfUine for Ecological EcononiU i. i'nn crsiiy o f .Miiryliiiitl, Bo.c 3S. Solomons. MD 206SS. USA
"■Economics Deponmeni (emcnitisj. L'nneriily of J() ofjii>rg, Laramie. I Vy 82070, L'S.4
Center for Encironmeni and Climate Studies, Wageningeit Agricultural Unicersiiy, P.O. Box 9101,
6700 IIB IVogeniiigen, The Netherlands
* Graduate School o f Public and Inieriiaiional Affairs, Unii ersiiy o f Pittsburgh, Pittsburgh, PA 15260, USA
' Geography D epanm ent and N C S A . U nnersity o f Illinois, Urbana, IL 6 IS 0 I, USA
“
^ Insiiiute o f Ecosystem Studies, M illbrook, N Y , US.4
’■Department o f Ecology. Ecolution and Behaeior. Lim ersity o f M innesota. Si. Paul. M N 5SI0S. USA
' Dicironmenial Sciences DiiLfmn. Oak Ridge S aiional Laboratory, O ak Ridge, T N 37S3I, USA
hill of Ecology. Faaillv o f Agroi:..m\. id .-.c m i} o f Bliemi.'. Aires. .-Ii. Son M arlin 4A5.1 I-II7 Buenos Aires. Argentina
Jci Propiihioii Lilborolory. Pa.niilcna. C.4 91109, L S.4
Cmmrnl Center fo r Geographic Inform ation and .-tnaiysis. Depurimcni o f Geography, U nkersity o f California at Saiila Barbara,
S a m s Barbara. CA 9.U06. U SA
’
Ecological Economics Resc,..-,.n and Applications inc., P.O. B ox 1589, Solom ons M D 20688, USA
'■rart
IWffmces o f ecoJogical systems and the natural capital stocks th at produce them are critical to the functioning
be Eanh s life-support system. They contribute to hum an welfare, both directly and indirectly, a n d therefore
H o t part o f the total economic value o f the planet. We have estim ated the cu rrent econom ic value o f 17
itm services for 16 biomes, based on published studies and a few original calculations. F o r the entire biosphere,
luelmost o f which is outside the m arket) is estim ated lo be in the range of U S S 16-54 trillion ( lO 'h p er year,
an average of USS33 trillion per year. Because o f the nature o f the uncertainties, this m ust be considered a
m m estimate. G lobal gross nationaJ product total is around US$18 trillion p er year. © 1998 Elsevier Science
All rights reserved.
E
mods: Ecological systems; C apital stocks; Ecosystem services
iwtsponding author. E-mail; [email protected]
leirinied with permission from Naiure, vol. 387, May 15 1997, pp. 253-260.
4((l9/98/S 19.00 C 1998 Elsevier Science B.V. All rights reserved.
|K2l-8009(98)00020-2
R . Cosiaiiza et al. / Ecological E conom ics 25 (I9 9 S ) 3 - 1 5
1. Introduction
B ecause ecosystem services are not fully ‘cap ­
tu re d ’ in com m ercial m a rk e ts or adequately
q u an tified in term s co m p arab le with econom ic
services a n d m a n u fa c tu re d capital, they are often
given to o little w eight in policy decisions. This
neglect m ay ultim ately com prom ise the sustain ­
ability o f h u m a n s in the biosphere. The econom ies
o f th e E a rth w ould g rin d to a halt w ithout the
services o f ecological life-support systems, so in
o n e sense th e ir to tal value to the econom y is
infinite. H ow ever, it can be instructive to estim ate
th e ‘in c re m e n ta l’ o r ‘m a rg in a l’ value o f ecosystem
services (the estim ated rate o f change o f value
co m p ared w ith ch an g es in ecosystem services
from th e ir c u rre n t levels). T h ere h a \e been m any
studies in the p ast few decades aimed at estim at­
ing the value o f a w ide variety of ecosystem
services. W e have g a th e re d together this large (but
scattered ) a m o u n t o f in fo rm atio n and present it
here in a fo rm useful fo r ecologists, econom ists,
policy m ak ers an d the general public. F rom this
synthesis, we have estim ated values for ecosystem
services p er u n it area by biom e. and then m ulti­
plied by the to ta l area o f each biom e and sum m ed
over all services an d biom es.
A lth o u g h we acknow ledge th a t there are m any
co n cep tu al a n d em pirical problem s inherent in
p ro d u cin g such an estim ate, we think this e.\ercise
is e s s e n tia l in o rd e r to: (1) m ake the range o f
p o ten tial values o f the services of ecosystem s
m ore a p p a re n t; (2) estab lish al least a first ap ­
p ro x im a tio n o f the relative m agnitude o f global
ecosystem services; (3) set up a fram ew ork for
their fu rth e r analysis; (4) point out those areas
m ost in n eed o f a d d itio n a l research; and (5) stim ­
u late a d d itio n a l research an d debate. M ost o f the
p ro b lem s a n d u n certain ties we encountered indi­
cate th a t o u r estim ate represents a m inim um
value, w hich w ould p ro b a b ly increase: (1) with
ad d itio n al effo rt in studying and valuing a
b ro a d e r ran g e o f ecosystem services: (2) with the
in c o rp o ra tio n o f m o re realistic representations o f
ecosystem dyn am ics a n d inter-dependence; and
(3) as ecosystem services becom e m ore stressed
a n d ‘scarce’ in' the fu tu re.
2. Ecosystem functions and ecosystem services
Ecosystem fun ctio n s refer vario u sly to the hal
tat, biological o r system p ro p e rtie s o r processes
ecosystem s. Ecosystem g o o d s (such as food) ai
services (such as w aste assim ilatio n ) represent I
benefits hu m an p o p u la tio n s derive, directly
indirectly, from ecosystem fu n ctio n s. F o r sinipli
ity, we will refer to ecosystem go o d s an d servic
together as ecosystem services. A large number
functions and services can be identified (de Grot
1987, 1992; T u rn e r, 1988, 1991). D aily (19“
provides a recent, d etailed co m p en d iu m on j
scribing, m easuring a n d v alu in g ecosystem se
vices. F o r the p u rp o se o f this analysis we group
ecosystem services in to 17 m a jo r categories. The
groups are listed in T ab le 1. W e included on
renew able ecosystem services, excluding non ^
ncw able fuels an d m inerals a n d the atmosphor
N o te the ecosystem services a n d functions do nt
necessarily show a o n e-to -o n e correspondence,
som e cases a single ecosystem service is
p ro d u ct o f tw o o r m o re ecosystem funclii
w hereas in o th er cases a single ecosystem funci
co n trib u tes to tw o o r m ore ecosystem services
is also im p o rtan t to em phasize the interdepend
n a tu re o f m any ecosystem functions. F o r e.\a
pie, som e o f the net p rim ary production in
ecosystem ends up as fo o d , the consumption
w hich generates re sp irato ry p ro d u c ts necess;
for prim ary p ro d u ctio n . E ven th o u g h these fui
tions and services are in te rd e p en d en t, in ma
cases they can be a d d e d because they represc
jo in t p ro d u c ts’ o f the ecosystem , which supp:
hum an welfare. T o the ex ten t possible, we ha'
attem pted to distinguish jo in t a n d ‘add ab ie’ pro,
ucts from p ro d u c ts th a t w ould represent 'douit
co u n tin g ’ (because they rep resen t different aspf«
o f the sam e service) if they w ere added. It is al.
im p o rtan t to recognize th a t a m inim um level
ecosystem ‘in fra stru c tu re ’ is necessary in order
allow pro d u ctio n o f the range o f services shown
T able 1. Several au th o rs have stressed the impf
tance o f this ‘in fra stru c tu re ’ o f the ecosystem ii^
as a c o n trib u to r to its to ta l value (Costanza
D aly, 1992; T u rn e r a n d P earce, 1993). This cc.'
p o n en t o f the value is n o t inclu d ed in the curr^
analysis.
R. Costanza et al. /Ecological Economics 25 (1998) 3-15
TaM I
iCTtysMm services and Tunclions used in this study
Ecosystem service*
Ecosystem functions
Examples
Gas regulation
Regulation of atmospheric chemical com­
position
Regulation of global temperature, precipi­
tation and other biological mediated cli­
matic processes al global or local levels
Capacitance, damping and integrity of
ecosystem response to environmental fluc­
tuations
COj/Oj Balance. 0 , for UVB protection,
and SO, levels
Greenhouse gas regulation, DMS produc­
tion a/Tecfing cloud formation
Climate regulation
Disturbance regulation
Water regulation
Regulation of hydrological flows
Water supply
Storage and retention of water
Erosion control and sed­
iment retention
Retention of soil within an ecosystem
Soil formation
Soil formation processes
Nutrient cycling
Storage, internal cycling, processing and
acquisition of nutrients
W a s te tr e a tm e n t
Recovery of mobile nutrients and removal
Pollination
or breakdown of excess of xenic nutrients
and compounds
Movement of floral gametes
Biological control
Refugia
Tropliit-d)iiamic regulations of popula­
tions
Habitat for resident and transient popula­
tions
Food production
That portion of gross primary production
extraciable as food
Raw materials
That portion of gross primary production
extraciable as raw materials
Sources of unique biological materials and
products
Genetic resources
Recreation
Cultural
Storm protection, flood control, drought re­
covery and other aspects of habitat re­
sponse to environmental variability mainly
Controlled by vegetation structure
Provisioning of water for agricultural (such
as irrigation or industrial (such as milling)
processes or transportation
Provisioning of water by watersheds, reser­
voirs and aquifers
Prevention of loss of soil by wind, runoff,
or other removal processes, storage of stilt
in lakes and wetlands
Weathering of rock and the accumulation
of organic material
Nitrogen fixation, N. P and other elemental
or nutrient cycles
Waste treatment, pollution control, detoxifi­
cation
Provisioning of pollinators for the repro­
duction of plant populations
Keystone predator control of prey species,
reduction of herbivory by top predators
Nurseries, habitat for migratory species, re­
gional habitats for locally harvested species,
or overwintering grounds
Production of fish, game, crops, nuts, fruits
by hunting, gathering, subsistence farming
or fishing
The production of lumber, fuel or fodder
Medicine, products for materials science,
genes for resistance to plant pathogens and
crop pests, ornamental species (pets and
horticultural varieties of plants)
Providing opponunities for recreational ac­ Eco-iourism, sport fishing, and other out­
tivities
door recreational activities
Providing opponunities for non-commer­
Aesthetic, artistic, educational, spiritual
cial uses
and/or scientific values of ecosystems
Vfr include ecosystem ‘goods' along with ecosystem services.
. ^^ltu^al cap ital and eco sy stem services
h general, capital is considered to be a stock o f
itterials or information that exists at a point in
time. Each form o f capital stock generates, either
autonom ously or in conjunction with services
from other capital stocks, a flow o f services that
may be used to transform materials, or the spatial
R. C oilanza el al. / Ecological E conom ics 2 5 (1998) 3 - IS
con.ij. uFiitie n o l'm aterials, to enhance the welfare
o f hum ans. T he hum an use o f this flow of services
m ay or m ly not leave the original capita! stock
in tact. C apital stock takes different identifiable
fo n n s, most notably in physical form s including
n atu ral capital, such as tree, minerals, ecosystem,
the atm osphere and so on; m anufactured capital,
such ;is mac hir es and buildings; and tlic human
cajiital o f phy;ic;ij bodies. In addition, capital
s tic k s can take intangible form s, especially as
inform ation such as th a t stored in com puters and
in individual hum an brains, as well as that stored
in species and ecosystems.
Ecosystem se n ices consist o f flows o f materials,
energy and inform ation from natural capital
stocks which com bine with m anufactured and h u ­
m an capital services to produce hum an welfare.
A lthough it is possible to iniaaiiic generating hu­
m an welfare w ithout natural capital and ecosys­
tem services in artificial ‘space colonies’, this
possil'iliiy is too rem ote tind unlikely to be o f
m uch current interest. In fact, one additional way
to think ab o u . the value o f ecosystem services is
to Jc erm ine w hat it would cost to replicate them
in a' technologically produced, artificial biosphere.
E.xpcriencc with m anned space missions and with
Biosphere II in \riz o n a indicates that this is an
exceedingl; com plex and expensive proposition.
Biosphere I (the E arth) is a very efficient, Icastco rl pi'ovidcr ol hum an lifc-support services.
" h u s wc can consider the general class o f n atu ­
ral ctipitul as essential to hum an welfare. Zero
natural c ipilal imphos zero hum an welfare be­
cause it is not feasible to substitute, in total,
p u rely ‘n o n -n atu ral’ capital for-.natural capital.
M anii actured and hum an capital require natural
capita for their construction (C ostanza and Daly,
1992). T herefore, it is not very meaningful to ask
the total value .jf natural capital to hum an wel­
fare. n o r to as'; the value o f massive, particular
form> ol n atu ial capital. It is trivial to ask what
is the valu o f ihe atm osphere to hum ankind,
o r w hat is ihc value o f rocks and soil infrastruc­
ture as suppo I systems. T heir value is infinite in
total.
However, it is meaningful to ask how changes
in the q uantity or quality o f various types of
n atu ral capital and ecosystem services m ay have
an im pact on hum an welfare. Such changes in­
clude both sm all changes a t large scales and large
changes al sm all scales. F o r exam ple, changing
the gaseous com position o f the global atm osphere
by a small am o u n t m ay have large-scale clim ate
change effects th a t will affect the viability and
welfare o f global hum an populations. Large
changes at sm all scales include, for exam ple, d ra ­
m atically changing local forest com position.
These changes m ay dram atically alter terrestrial
an d aquatic ecosystem s, having an im pact on the
benefits and costs o f local hum an activities. In
general, changes in p a rtic u lar form s o f natural
capital and ecosystem services will alter the costs
or benefits o f m aintaining hum an welfare.
■. A’alu.ilion of ecosystem services
'fh e issue o f valuation is inseparable from the
< lu)iccs an d decisions we have to m ake about
ecological system s (T u rn e r and Pearce, 1993;
Bingham , 1995). Some argue, th at valuation o f
ecosystems is cither im possible or unwise, that wc
cannot place a value on such 'iiuiingibles' as
hum an life, environm ental aesthetics, o r long­
term ecological benefits. But, in Tact, we do so
every day. W hen we set construction standards
for highw ays, bridges an d the like, we value hu­
m an life (acknow ledged or not) because spending
m ore m oney on construction w ould save lives.
A n other frequent argum ent is th at we should
pro tect ecosystem s for purely m oral or aestlietic
reasons, an d we do n o t need valuations o f ecosys­
tems for this purpose. B ut there are equally com ­
pelling m oraJ 'arg u m en ts that m ay be in direct
conflict w ith the m oral argum ent to p ro ’ecl
ecosystems; fo r example, the m oral argum ent th at
no one should go hungry. M oral argum ents tran s­
late the valuation and decision problem uiu a
different set o f dim ensions and a di'fereiit h.nguagc o f discourse (T urner and Pearce. 199.1); one
that, in o u r view, m akes the problem o f valuation
and choice m ore difficult and less e.xplicit. But
m oral and econom ic argum ents are certainly not
m utually exclusive. B oth discussions can and
should go on in parallel.
K. Cosumza el a i / Ecological Economies 23 flPfS} 3-13 .
So, although ecosystem valuation is certainly
difEcult and fraught with uncertainties, one choice
we do not Hhve is whether or not to do it. Rather,
the decisions we make as a society about ecosys­
tems imply valuations (although not necessarily
expressed in monetary terms). We can choose to
make these valuations explicit or not; we can do
them with an explicit acknowledgenient of the
huge uncertainties involved or not; but as long as
we arc forced to make choices, we are going
through the process of valuation.
The exercise of valuing the services of natural
capital ‘at the margin’ consists of detennining the
differences that relatively small changes in these
services make to human welfare. Changes in qual­
ity or quantity of ecosystem services have value
insofar as they either change the benefits associ­
ated with human activities or change the costs of
those activities. These changes in benefits and
costs either have an impact on human welfare
through established markets or through non-mar­
. ket activities. For example, coral reefs provide
habitats for fish. One aspect of their value is to
increase and concentrate fish stocks. One effect of
changes in coral reef quality or quantity would be
discernible in commercial fishenes markets, or in
recreational fisheries. But other aspects of the
value of coral reefs, such as recreational diving
and biodiversity conservation, do not show up
completely in markets. Forests provide timber
materials through well established markets, but
the associated habitat values of forests are also
felt through unmarketed recreational activities.
The chains of effects from ecosystem services to
human welfare can range from extremely simple
to exceedingly complex. Forests provide timber,
but also hold soils and moisture, and create mi­
croclimates, all of which contribute to human
welfare in complex, and generally non-marketed
ways.
5. Valuation methods
Various methods have been used to estimate
both the market and non-market components of
the value of ecosystem services (Costanza et al.,
1989; Mitchell and Carson, 1989; Dixon and
Sherman, 1990; Barde and Pearce, 1991; Aylward
and Barbier, 1992; Pearce, 1993; Costanza and
Folke. 1997; Goulder and Kennedy, 1997). In this
analysis, we synthesized previous studies based on
a wide variety of methods, noting the limitations
and assumptions underlying each.
Many of the valuation techniques used in the
studies covered in our synthesis arc based, either
directly or indirectly, on atlempis to estimate the
‘willingness-to-pay’ of individuals for ecosystem
services. For example, if ecological services pro­
vided a S50 increment to the timber productivity
of a forest, then the beneficiaries of this service
should be willing to pay up to $50 for it. In
addition to timber production, if the forest of­
fered non-markeled, aesthetic, existence and con­
servation values of $70, those receiving this
non-market benefit should be willing to pay up to
S70 for it. The total value of ecological services
would be $120, but the contribution to the money
economy of ecological services would be $50, the
amount that actually passes through markets. In
this study we have tried to estimate the total value
of ecological services, regardless of whether they
are currently marketed.
Fig. 1 shows some of these concepts diagrammairi-ally. Fig. la shows conventional supply
(maijinal cost) and demand (marginal benefit)
curves for a typical marketed good or service. The
value that would show up in gross national
product (GNPJ is the market price p times the
quantity q, or the area pbqc. There are three other
relevant areas represented on the diagram, how­
ever. The cost of production is the area under the
supply curve, cbq. The ‘producer surplus’ or 'net
rent’ for a resource is the area between the market
price and the supply curve, pbc. The ‘consumer
surplus’ or the amount of welfare the consumer
receives over and above the price paid in the
market is the area between the demand curve and
the market price, abp. The total economic value of
the resource is the sum of the producer and
consumer surplus (excluding the cost of produc­
tion), or the area uic on the diagram. Note that
total economic value can be greater or less than
the price times quantity estimates used in GNP.
Fig. la refers to a human-made, substitutable
good. Many ecosystem services are only substi­
R. Cosianza ei al. /Ecological Econamia 25 [I99g) 5 -1 5
tutable up to a point, and their demand curves
probably look more like Fig. lb. Here the de­
m and approaches infinity as the quantity avail­
able approaches zero (or some minimum
necessary level o f services), and the consumer
surplus (as well as the total economic value) ap­
proaches infinity. Demand curves for ecosystem
IQ.
Quantity
Quantity
Fig. 1. Supply and demand curves, showing the definitions of
cost, net rent and consumer surplus for normal goods (a) and
some essential ecosystems services (b). See text for funher
explanation.
services are very difficult, if not impossible, to
estimate in practice. In addition, to the
i t that
ecosystem services cannot be increased or de­
creased by actions of the economic system, their
supply curves are more nearly vertical, as shown
in Fig, Ib.
In this study we estimated the value per unit
area of each ecosystem service for each ecosystem
type. To estimate this ‘unit value’ we used (in
order of preference) either: (J) the sum o f con­
sumer and producer surplus; or (2) the net rent
(or producer surplus); or (3) price times quantity
as a proxy for the economic value of the service,
a.ssuming that the demand curve for ecosystem
services looks more like Fig. Ib than Fig. la, and
that therefore the area pbqc is a conservative
underesttniate of the area abc. We then multiplied
the unit values times the surface area of each
ecosystem lo arrive at global totals.
6. Ecosystem values, markets and GNP
As wc have noted, the value of many types of
natural capital and ecosystem services may not be
easily traceable Ihroush well functiorjiriE markets,
or may not show up in markets at all. Fc- exam­
ple, the aesthetic enhancement of a for u may
alter recreational expenditures at that site, i ■ this
change in expenditure bears no necessary relation
to the value of the enhancement. Recreationists
may value the improvement at $100. but transfer
only S20 in spending from other recreational areas
to the improved site. Enhanced wetlands quality
may improve waste treatment, saving on potential
treatment costs. For example, tertiary treatment
by wetlands may save 5100 in alternative treat­
ment. Existing treatment may cost only S30. The
treatment cost savings does not show up in any
m arket There is very little relation between the
value of services and observable current spending
behaviour in many cases.
There is also no necessary relationship betw'een
the valuation of natural capital service flows, even
on the margin, and aggregate spending, or GNP,
in the economy. This is true even if all capital
service flows had an impact on well functioning
markets. A large part of the contributions to
R. C osianza el al. / E cological E co n o m ia 25 (1998) 3 - 1 5
NIIII
100
[ M i l
II
1000
$ ha-1 y
10000
20000
Fig. 2. Global map of ihe \alue of ecosystems services. See Supplemenlarj Informaiion and Table 2 for details.
human welfare by ecosystem services are of a
purely public goods nature. They accrue directly
to humans without passing through the money
economy at all. In many cases people are not even
aware of them. E,xamples include clean air and
water, soil formation, climate regulation, waste
treatment, aesthetic values and good health, as
mentioned above.
7. Global land use and land cover
In order to estimate the total value of ecosys­
tem services, we needed estimates of the total
global extent of the ecosystems themselves. We
devised an aggregated classification scheme in 16
primary categories as shown in Table 2 to repre­
sent current global land use. The major division is
between marine and terrestrial systems. Marine
was further subdivided into open ocean and
coastal, which itself includes estuaries, seagrass'algae beds, coral reefs and shelf systems. Terrestrial
systems were broken down into two types of
forest (tropical and temperate/boreal), grasslands/
rangelands, wetlands, lakes/rivers, desert, tundra,
ice/rock, cropland and urban. Primary data were
from Matthews (1983) as summarized in de Groot
(1992) with additional information from a num­
ber of sources (Ryther, 1969; Deevey, 1970; Whit­
taker and Likens, 1975; Ehrlich et al., 1977;
United Nations Environmental Programme First
Assessment Report, 1990), We also used data
from Bailey (1996), as a cross-check on the terres­
trial estimates and Houde and Rutherford (1993),
Pauly and Christensen (1995) as a check on the
marine estimates. The 32 landcover types of
Matthews (1983) were recategorized for Table 2
and Fig. 2. The major assumptions were: (1)
chaparral and steppe were considered rangeland
and combined with grasslands; and (2) a variety
T ihl* I
Sum mary o f av erafe global aitue of annual em iyilcm le rv k c i
Dk »
m
A rea
Ecoeyslem . scrvicea (1994 USSha ' 7 * " ' ')
T o lil tlo tu l
T out
value per flow value
h a ( S h a - ' (J y e a r - '
y e a r - ')
X 10*)
•
(ha
*
X
10*)
1
(G as
regutalioo)
M anne
2
(Climate
rtgulalion)
3
(D lilurbance reg­
ulation 1
4
(W ater
regululion)
3
(W aler
iu|>-
6
(Erosiun
con-
ply)
irol)
7
(Soil
Tonnilion)
8
9
(N ultient cy­
cling)
(W aile
Ircai-
10
(Pollinalion)
IIK'lll)
12
II
(Uio logi­ (Mabical con- lati
rctugia)
iroJ)
13
(Food
pniducli»n)
14
(Raw
m alcrialt)
16
13
(Ge(Reerenclic re- alion)
eources)
17
(Cullu n l]
377
36 302
33 220 38
Open
ocean
C oaiiat
3I0Z
Esiuaitcs 1*0
S cag rau / 2UU
algiie
beds
Coral
62
fcori
2660
shcir
Tcrrcauiat
13 323
1
88
567
118
3
3677
21 UKl
I9 0II2
38
78
3
2750
38
13
0
8
131
93
321
4
13
2
82
381
7
220
27
3008
68
2
39
1431
76'
232
61
29
■. 4032
22S32
19 004
20 949
■
8381
1136*
4110
3801
1
6075
373
70
1610
*04
4281
11319
1
969
2
2
2007
302
4706
3*13
*94
131
906
14 783
9990
4879
1641
I
§
s
F aicst
4*53
Tropical
IVtX>
Tem perule 39JJ
/boreal
G rass/
3(98 7
range­
lands
Wetlands
330
133
Tidal
163
m srih/
m an­
groves
Swamps/ 163
26S
flnoilplains
Lakes/riv­
200
ers
Desert
1923
T undra
743
'
Ice/rock
1640
1400
Cropland
U rban
332
Total
31 623 1341
141
223
2
1
3
'K,
10
3M
3
6
«
345
III
111
922
H(
II
0
3
29
M7
Il7
87
H7
1
4
43
32
511
23
67
1
23
138
313
23
16
41
0
66
112
36
2
3
G'
bi
4339
1*39
13
4177
dtrrn
38IK)
104
IM
236
466
,
106
162
574
631
881
•
I
7240
684
1779
31)
7r>o(i
163')
5443
2117
(,(i3
1113
1692
576
S3
171173
2277
439
47
491
49
130
41
l-t
24
117
417
1761
34
124
13*6
721
79
813
3013
19 580
323)
8498
1700
92
128
33 268
Num ber in (he body o f (he table in Shu ‘ ‘ y e a r ' R o w and colum n tolali are in J y e n r " ' * 1(1'' , coluiiui loliils arc (be *um o f the products ol’ the per ha services in the table and the area o f each biome, not Ihe sum oT
the pet ha sc m c e s Ihesntdvcs. Shaded cells indientc services that d o not occur sir a n know n lo he iicaii^ihle. C}pen oelli indicaK the lack o f available i n f o ^ t i o n .
'
R. Casianza ei at. /Ecological Economic) 25 (199S) 3 - 1 5
of tropical forest and woodland types were com­
bined into ‘tropical forests’.
9. Sources of error, timitatians and caveats
Our attempt to estimate the total current eco­
nomic value of ecosystem services is limited for a
8. Synthesis
number of reasons, including;
1. Although we have attempted to include as
We conducted a thorough literature review
much as possible, our estimate leaves out
and synthesized the inform a tion, along with a
many categories of services, which have not
few original calculations, during a 1 week inten­
yet been adequately studied for many ecosys­
sive workshop at the new National Center for
tems. In addition, we could identify no valua­
tion studies for some major biomes (desert,
Ecological Analysis and Synthesis (NCEAS) at
tundra, ice/rock and cropland). As more and
the University of California at Santa Barbara,
belter information becomes available we ex­
Supplementary Information lists the primary re­
pect the total estimated value to increase.
sults for each ecosystem service and biome. Sup­
2. Current prices, which form the basis (either
plementary Information includes all the estimates
directly or indirectly) of many of the valua­
we could identify from the literature (from over
tion estimates, are distorted for a number of
100 studies), their valuation methods, location
reasons, including the fact that they exclude
and stated value. We converted each estimate
the value of ecosystem services, household
into 1994 U S$ha“ ' y ear"' using the USA con­
labour and the informal economy. In addi­
sumer price index and other conversion factors
tion to this, there are differences between
. as needed. These are listed in the notes to the
total value, consumer surplus, net rent (or
Supplementary Information. For some estimates
producer surplus) and p x q, all of wliich are
we alJb converted the service estimate into USS
used lo estimate unit values (Fig. 1).
equivalents using the ratio of purchasing power
3. In many cases the values are based on the
GNP per capita for the country of origin to that
current willingness-to-pay of individuals for
of the USA. This was intended to adjust for
ecosystem services, even though these individ­
income effects. Where possible the estimates are
uals may be ill-informed and their preferences
stated as a range, based on the high and low
may not adequately incorporate social fair­
values found in the literature, and an average
ness, ecological sustainability and other im­
value, with annotated comments as to methods
portant goals (Costanza and Folke, 1997), In
and assumptions. We also included in the Sup­
other words, if we actually lived in a world
plementary Information some estimates from the
that was ecologically sustainable, socially fair
literature on ‘total ecosystem value’, mainly us­
and where everyone had perfect knowledge of
ing energy analysis techniques (Costanza ct al.,
their connection to ecosystem services, both
1989). Wc did not include these estimates in any
market prices and surveys of willingness-toof the totals or averages given below, but only
pay would yield very different results than
for comparison with the totals from the other
they currently do, and the value of ecosystem
techniques. Interestingly, these different methods
services would probably increase.
showed fairly close agreement in the final results.
4, In calculating the current value, we generally
Each biome and each ecosystem service had its
assumed that the demand and supply curves
special considerations. Detailed notes explaining
look something like Fig. la. In reality, supply
each biome and each entry in Supplemenlaiy
curves for many ecosystem services are more
Information are given in notes following the
nearly inelastic verticil lines, and the demand
table. More detailed descriptions of some of the
curves probably look more like Fig. lb, apecosystems, their services and general vaIuatiqii-<GG-—Ciii^roaching infinity as quantity goes to zero,
issues can be found in Daily (1997).
the consumer and producer surplus and
briefly discuss some general considerations'thatr'
'b [f
ly the total value of ecosystem services
apply across the board.
. -’ also apiyoach infinity.
/
R. Coslanza et al. /Ecological Economia 2S (!99S) 3 - IS
5. The valuation approach taken here assumes
that there are no sharp thresholds, disconti­
nuities or irreversibilities in the ecosystem
response functions. This is almost certainly
not the case. Therefore this valuation yields
an underestimate of the total value,
6. Extrapolation from point estimates to global
totals introduces error. In general, we esti­
mated unit area values for the ecosystem
services (in I h a “ ' y ear'") and then multi­
plied by the total area of each biome. This
can only be considered a crude first approxi­
mation and can introduce errors depending
on the type of ecosystem service and its spa­
tial heterogeneity.
7. To avoid double counting, a general equi­
librium framework that could directly incor­
porate
the
interdependence
between
' ecosystem functions and services would be
preferred to the partial equilibrium frame­
work used in this study (see below),
8. Values for individual ecosystem functions
should be based on sustainable use levels,
taking account of both the carrying capacity
for individual functions (such as food-produciion or waste recycling) and the combined
effect of simultaneous use of more functions.
Ecosystems should be able to provide all the
functions listed in Table 1 simultaneously
and indefinitely. This is certainly not the case
for some current ecosystem services because
of overuse at existing prices.
9. We have not incorporated the 'infrastructure'
value of ecosystems, as noted above, leading
to an underestimation of the total value.
10. Inter-country comparisons' of valuation are
affected by income difTercnces. We attempted
to address this in some cases using the rela­
tive purchasing power GNP per capita of the
country relative to the USA, but this is a very
crude way to make the correction.
11. In general, we have used annual flow values
and have avoided many of the difficult issues
involved with discounting future flow values
to arrive at a net present value of the capital
stock. But a few estimates in the literature
were stated as stock values, and it was neces­
sary to assume a discount rate (we used 50%)
in order to convert them into aimual flows.
12. Our estimate is based on a static ‘snapshot’
of what is, in fact, a complex dynamic sys­
tem. We have assumed a static and ‘partial
equilibrium' model in the sense that the value
of each service is derived independently and
added. This ignores the complex inter-depen­
dencies between the services. The estimate
could also change drastically as the system
moved through critical non-linearities or
thresholds. Although it is possible to build
‘general equilibrium' models in which the
value of all ecosystem services are derived
simultaneously with all other values, and to
build dynamic models that can incorporate
non-linearities and thresholds, these models
have rarely been attempted at the scale we
are discussing. They represent the next logical
step in deriving better estimates of the value
of ecosystem services.
We have tried to expose these various sources
of uncertainty whenever possible in Supplemen­
tary Information and its supporting notes, and
state the range of relevant values. In spite of the
limitations noted above, we believe it is very
useful lo synthesize existing valuation estimates, if
only to determine a crude, initial magnitude. In
general, because of the nature of the limitations
noted, we expect our current estimate to represent
a minimum value for ecosystem services.
10. Total global value of ecosystem services
Table 2 is a summary of the results of our
synthesis. It lists each of the major biomes along
with their current estimated global surface area,
the average (on a per hectare basis) of the esti­
mated values of the 17 ecosystem services we have
identified from Supplementary Information, and
the total value of ecosystem services by biome, by
service type and for the entire biosphere.
We estimated that at the current margin,
ecosystems provide at least USI33 trillion dollars
worth of services annually. The majority of the
value of service we could identify is currently
outside the market system, in services such as gas
regulation (USI1.3 trillion year“ ‘), disturbance
regulation (USS1.8 trillion year"*), waste treat-
K. Coslanza ei al. /Ecological Economies I S (I99S) 3-11
menl (US$2.3 trillion year “ and nutrient cycling
(US$17 trillion y e a r"'). About 63% of the esti­
mated value is contributed by marine systems
(US$20.9 trillion year " ') Most of this comes
from coastal systems (US$10.6 trillion year"'),
About 38% of the estimated value comes from
terrestrial systems, mainly from forests (US$4,7
trillion y e a r" ') and wetlands (US$4.9 trillion
y e a r" ').
We estimated a range of values whenever possi­
ble for each entry in Supplementary Information.
Table 2 reports only the average values. Had we
used the low end of the range in Supplementary
Information, the global total would have been
around USS19 trillion. If we eliminate nutrient
cycling, which is the largest single service, esti­
mated at USS17 trillion, the total annual value
would be around USS16 trillion. Had we used the
high end for ail estimates, along with estimating
the value of desert, tundra and ice/rock as the
average value of rangelands, the estimate would
be around USS54 trillion. So the total range of
, annual values we estimated were from US$ 16-54
trillion. This is not a huge range, but other
sources of uncertainty listed above are much more
critical. It is important to emphasize, however,
that despite the many uncertainties included in
this estimate, it is almost certainly an underesti­
mate for several reasons, as listed above.
There have been very few previous attempts to
estimate the total global value of ecosystem ser­
vices with which to compare these results. We
identified two, based on completely different
methods and assumptions, both from each other
and from the methods used in this study. They
thus provide an interesting check.
One was an early attempt at a static general
equilibrium input-output model of the globe, in­
cluding both ecological and economic processes
and commodities (Costanza and Neil, 1981;
Costanza and Hannon, 1989). This model divided
the globe into nine commodities or product
groups and nine processes, two of which were
'economic’ (urban and agriculture) and seven of
which were ‘ecological’, including both terrestrial
and marine systems. D ata were from about 1370.
Although this was a very aggregated breakdown
and the data was of only moderate quality, the
13
model produced a set of ‘shadow prices’ and
'shadow values’ for all the flows between pro­
cesses, as well as the net outputs from the system,
which could be used to derive an estimate of the
total value of ecosystem services. The input-out­
put format is far superior to the partial equi­
librium format we used in this study for
difTerentiating gross from net flows and avoiding
double counting. The results yielded a total value
of the net output of the seven global ecosystem
processes equal to the equivalent of US$9.4 tril­
lion in 1972. Converted to 1994 US$ this is about
$34 trillion, surprisingly close to our current aver­
age estimate. This estimate broke down into
US$11.9 trillion (or 35%) from terrestrial ecosys­
tem processes and US$22.1 trillion (or 65%) from
marine processes, also very close to our current
estimate. World GNP in 1970 was about $14.3
trillion (in J994 USS), indicating a ratio of total
ecosystem services to GNP of about 2.4-1. The
current estimate has a corresponding ratio of
1. 8 - 1.
A more recent study (Alexander et al., 1998)
estimated a ‘maximum sustainable surplus' value
of ecosystem services by considering ecosystem
services as one input to an aggregate global pro­
duction function along with labour and manufac­
tured capital. Their estimates ranged from USS3.4
to US$17.6 trillion year ', depending on various
assumptions- This approach assumed that the to­
tal value of ecosystem services is limited to that
which has an impact on marketed value, either
directly or indirectly, and thus cannot exceed the
total world GNP of about US$18 trillion. But, as
we have pointed out, only a fraction of ecosystem
services affects private goods traded in existing
markets, which would be included in measures
such as GNP. This is a subset of the services we
estimated, so we would expect this estimate to
undervalue total ecosystem services.
The results of both of these studies indicate,
however, that our current estimate is at least in
approximately the same range. As we have noted,
there are many limitations to both the current and
these two previous studies. They are all only static
snapshots of a biosphere that is a complex, dynanoic system. The obvious next steps include
building regional and global models of the linked
(4
K. Cosiama et al. /Ecological Eeotiomics 25 (199S) 3-15
ecological economic system aimed at a better un­
derstanding of both the complex dynamics of
physical/biologicai processes and the value of
these processes to human well-being (Costanza et
al„ 1993; BocfcslaeJ, 1995). But we do not have to
wait for the results of these models to draw the
following conclusions.
11. Dbcussioo
What this study makes abundantly dear is that
ecosystem services provide an important portion
of the total contribution to human welfare on this
planet We must begin to give the natural capital
stock that produces these services and adequate
weight in the decision-making process, otherwise
current and continued future human welfare may
drastically suffer. We estimate in this study that
the annual value of these services is USS16-54
trillion, with an estimated average of USS33 tril­
lion. The real value is almost certainly much
larger, even at the current margin, L pS' $ 3 3 trillion
is 1.8 times the current global GNP, One way to
look at this comparison is that if one were to try
to replace the services by ecosystems at the cur­
rent margin, one would need to increase global
GNP by at least USS33 trillion, partly to cover
services already captured in existing GNP and
partly to cover services that are not currently
captured in GNP. This impossible task would
lead to no increase in welfare because we would
only be replacing existing services, and it ignores
the fact that many ecosystem services are literally
irreplaceable.
If ecosystem services were actually paid for, in
terms of their value contribution to the global
economy, the global price system would be very
different from what it is today. The price of
commodities using ecosystem services directly or
indirectly would be much greater. The structure of
factor payments, including wages, interest rates
and profits would change dramatically. World
GNP would be very difTerent in both magnitude
and composition if it adequately incorporated the
value of ecosystem services. One particular use of
the estimates we have developed is to help modify
systems of national accounting to belter reflect the
value of ecosystem services and natural capital.
Initial attempts to do this paint a very different
picture of our current level of economic welfare
than conventional GNP, some indicating a level­
ling of welfare since about 1970. while GNP has
continued to increase (Daly and Cobb, 1989;
Cobb and Cobb, 1994; Max-Neef, 1995). A sec­
ond important use of these estimates is for project
appraisal, where ecosystem services lost must be
weighed against the benefits of a specific project
(Bingham, 1995). Because ecosystem services are
largely outside the market and uncertain, they are
too often ignored or undervalued, leading to the
error of constructing projects whose social costs
far outweigh their benefits.
As natural capital and ecosystem services be­
come more stressed and more ‘scarce’ in the fu­
ture, we can only expect their value to increase. If^
significant, irreversible thresholds are passed for
irreplaceable ecosystem services, their value may
quickly jump to infinity. Given the huge uncer­
tainties involved, we may never have a very pre­
cise estimate of the value of ecosystem services.
Nevertheless, even the crude initial estimate we
have been able to assemble is a useful starting
point (we stress again that it is only a starting
point). It demonstrates the need for much addi­
tional research and it also indicates the specific
areas that are most in need of additional study. It
also highlights the relative importance of ecosys­
tem services and the potential impact on our
welfare of continuing to squander them.
Acknowledgements
S.
Carpenter was instrumental in encouraging
the project, M. Grasso did initial identification
and collection of literature sources. We thank S,
Carpenter, G, Daily, H. Daly, A.M. Freeman, N,
Myers, C. Perrings, D. Pimentel, S. Pimm and S.
Postel for helpful comments on earlier drafts. This
project was sponsored by the National Center for
Ecological Analysis and Synthesis (NCEAS), an
NSF-funded Center at the Uriiversity of Califor
nia at Santa Barbara. The authors met during th<
week of June 17-21, 1996 to do the major part!
of the synthesis activities. The idea for the stud>
R. Cosianza et al. /Ecological Economics 25 (199S) 3 -1 5
emerged at a meeting of the Pew Scholars in New
Hampshire in October 1995.
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Biodiversity
M easu rem en t an d
estimation
E d ited by
D.L. Hawksworth
Director
In tern a tio n a l Mycological Inslitiite
Surrey, U K
Q
iq y a l < S o c ie ^
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Preface
J O H N L. H A R P E R i
and
D A V I D L. H A W K S W O R T H ^
‘ C-ie Groes, Glan-y-<wtd P ark, D w yg yfyk h i, Ptnmaenmnwr, Gwynedd LL34 6 T L , U .K .
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CONTENTS
1.
2.
3.
4.
Introduction
W hat is ‘biodiversity’?
Is biodiversity just the num ber o f species in an area?
I f biodiversity is m ore than tJic num ber o f speru s bow can it be me
(a) T axic measures
(b) M olecular m easures
(c) Phylogenetic m easures
5. Arc all species o f equal weiglu?
6.
7.
8.
9.
10.
PA G E
5
6
red?
Should biodiversity measures include infraspeci/ic genetic variance^’
D o some species contribute more than otlicrs to ilic biodiversity of an area?
Arc there useful indicators o f areas where biodiversity is high?
Can the extent o f biodiversity in taxonom ic groups be estim ated by extrapolation?
Conclusions
References
7
8
6
B
8
9
9
9
10
II
II
II
SU M M A R Y
In introducing a scries o f 11 papers on the m easurem ent and estim ation o f biodiversity, eight crucial
questions arc posed: W hat is ‘biodiversity’? Is biodiversity just the num ber o f species in an area? I f
biodiversity is m ore than the num ber o f species how can it be measured? Arc all species o f equal weight?
Should biodiversity measures include infVaspcciftc gcnciic variance? D o some species contribute more
than others to the biodiversity o f an area? Arc there useful indicators ofarcas where biodiversity is high?
A nd can the extent o f biodiversity in taxonom ic groups be estim ated by extrapolation? In addition, the
m odern concept o f biological diversity is attributed to Elliot R. Norse and liis colleagues.
1. IN T R O D U C T IO N
W ithin six years the word ’biodiversity’ has exploded
into the vocabulary o f the popular press, governm ental
and intergovernm ental reports, scientific papers and
m eetings. In the scientific literature the growth in
usage o f the term lias been dram atic (figure I).
It seems reasonable to ask o f a word that is so
w idely used, just what is it supposed to m ean. Is it just
a new linguistic bottle for the wine o f old ideas - a
changed fashion label designed to attract funding - or
docs it refer to new and fundam ental questions
in science? M ost especially, it seem s sensible to ask
w hether ‘biodiversity’ is a property that can be
m easured and if so w h at is the most appropriate
form that such m easurem ent should take.
W e m ay wish to ask such questions as; ‘Does
biodiversity confer stability?’; ‘D oes biodiversity
confer productivity?’; ‘D oes biodiversity reflect sustain-
aliility?’; 'Docs bitnliversity reflrrt the evolutionary
lime elapsed w hhoiit major disturbance?’; alterna­
tively, 'Docs biodiversity reflect the frequency o f
major disturbance in ecological or evolutionary
history?'^ Wc m ight reasonably expect to have some
measure o f this thing that wc call biodiversity that wc
m ight use in a graphic plot or statistical analysis
designed to answer these questions. In particular, wc
m ay wish to ask w hether one species (or population, or
com m unity) is m ore or less diverse than another. Until
we have decided how to measure 'biodivenity' we
cannot begin lo m obilize serious science into answering
these questions and others posed in the ‘research
«
• We might have mentioned 'ecosystem runction' among thoie
Features that might be influenced by biodiverjiiy. However, one
of uj finds the notion that an ecosystem might 'function' (verb) or
‘have a function* (substantive) so incongruous that he has
relegated the mcndon to this footnote (where it is even more
likely to be noticed).
'
6
J .
L .
H
a q >
c r
a
n
d
D ,
L.
H
a w
k
j w
o
r d
i
Prtjace
agenda Tor biodiversity’ (Solbrig 1991). But, 'The
need for increased objectivity through mcusurcnicnt is
not merely a scientific quest but can contribute to
issues o f topical concern at all levels o f society’
(Lovcjoy, this volum e).
In particular we need such a measure ;is part o f the
justification for spending limited financial resources
on protecting, conserving, studying or cxiiloring some
com m unities and so denying tlic rcsource.s to do the
same to others.
O f course, the collection o f papers in this volume
may reveal that the word ‘biodiversity’ means quite
di/Tercnt things to di/Tercnt people. This would be a
pity but better to be revealed and acknowledged than
allow ed to cause confusion.
T his series o f papers has been commissioned to
encourage the scientific analysis o f biodiversity, and
particularly to force the question ‘How do we best
measure organismal biodiversity?’ We arc aware that
the answer miglit simply be 'By counting the number o f
species’, but it is clear from various papers contributed to
this tlicnic volume that there arc deeper issues involved.
7'hcre is also plenty o f scope for controversy.
2. W H AT IS 'B IO D IV E R SIT Y ' ?
Figure 1. Growth of the number of hits for the term
'biodivrrsity' m the scientific (itcraturc as catalngiird in
BIOSIS I ile 5 (1969 onwards). This prescniauon is based on
acciiuiiiJ.itirig the number o f hits within each year; the (oiaf
of 921 a I the end of April 1994 is an overestimate due to
dmiblc-t oLUiting of diationg witlt more than one year date;
the ai iiial number of single tides in the period was 808.
I'm piiictical purposes, ‘liiodivcrsity’ can be
considcrctl as synonym ous with ‘biological diversity’
as dt'liticd by Norse et al. (1986), T his is reinforced by
the ollicial definition in Article 2 o f the ‘Convention
on Biological D iversity’, signed by 156 nations and
the European C om m unity at the U nited Nations
C on lrifn cc on the Environm ent and Developm ent,
' 1 he I.arth Sum m it’ in 1992 which closely mirrors tlie
cotici’pt ol Norse et al. (U nited N ations Environment
I’rogr.iinmc 1992, p. 27):
'Biological diversity' has a long history of usage in a
variety o f contexts, but the start o f its rise in the
current senses can be traced to three publications
which appeared in 1980: Lovcjoy (1980fl,A) did not
provide a formal definition but used it essentially in
the sense o f the num ber of species present, and Norse
& M cM anus (1980) em ployed it to include ‘two
related concepts: genetic diversity ami ecological
diversity'. T h e latter authors equated ecological
'"lhalogical diversity" m eans the variability am ong
diversity with species richness, ‘the number o f species
hving
organisms from all sources including, inter
in a com m unity of organisms'. There were various
aliii, icrrcstria], m arine and other arjuaiic systems
usages in the United States in the early 1980s, mainly
ami
the ecological com plexes o f which they arc
in connection with conferences with whicli Elliot
part;
this includes diversity within species, betwceti
Norse or his colleagues were involved, most notably
spec
ics
and of ecosystems [jtfj.’
the U.S. Slrau^!/ Conjertnu m Bialogual DivtTsiitj iti
N ovem ber 1981 (U .S. Department o f State 1982).
I'hc.se tiirce (cvcfs are all considered in the Global
However, it was Norse ti al. (1986, p, 2) who
Biodivenily Assessment currently being prepared by the
expanded this usage to refer unequivocally to
U nited Nations E nviionm cnt Programm e with fund­
biological diversity at three levels: genetic (within
ing through the G lobal Environm ent Facility ( C E F )
species), species (species numbers) and ecological
adm inistered by the U nited N ations D evelopm ent
(com m unity) diversity.
Programm e.
T h e contracted form ‘biodiversity’ was evidently
It i-s therefore essential chat scientists, who use cither
coined by W alter G. Rosen in 1985 for the first
tlic expanded or the contracted term in a technical
planning conference o f what was to be a Jcey
sense that does not em brace ali three levels, specify
meeting, the ‘N ational Forum on BioDivcrsity’, which
which level is intended. Wc therefore propose the
convened in W ashington, D.C, in Septem ber 1986.
use o f the adjectives 'genetic’, ‘organism al’, and
T he proceedings o f tliat forum, edited by Wilson
'ecological’. ‘O rganism al’ is preferred to ‘species’ so
(1988a) under the title Biodim sity, launched the word
as In em brace faxonotnie categories above species
into general use. T h e term was defined only in as far
rank, Lldredgc (1992) u.scd ‘genealogical’, ‘pheno­
as it Teprcscnts, as well as any term can, the vast
typic’, and ‘ecological’ in a parallel manner, but wc
array o f topics and perspectives covered during the
prefer ‘organism al’ to ‘plicnotypic’ as its m eaning is
W ashington forum’ (W ilson 1988^1, p. vi). Norse’s
more transparent to a non-specialist. T h e usage o f
seminal papers were not cited in any of the 57
organl.sma] is also consistent with the need identified
contributions to that volume. The word ‘biodiversity’
by Norse (1993) to view biological diversity at higher
first appears in the Biological Aistracls ‘ b i o s i s ’ database
taxonom ic levels.
in 1988 with four rcfcrcncc.s, and by the end of April
W c arc unhappy with references to ‘ecosystem ’
1994 that number had escalated to 688 (figure I).
diversity and prefer “com m unity’ or 'ecological’
Preface
diversity. Tansley (1935) introduced the word
‘ecosystem’ to refer to a community of organisms in
the context of and including tlicir physical environ­
ment. Clearly the physical environment docs not have
a biodiversity. Reference to 'the biodiversity of an
ecosystem’ devalues two useful concepts in the same
phrase.
3. IS B IO D IV E R S IT Y J U S T T H E N U M B E R O F
S P E C IE S IN AN A R E A ?
Species can be counted and the number of species
present at a site might seem to be a quantitative
measure of its biodiversity and allow comparison with
Other sites. But this assumes that all species at a site,
within and across systematic groups, contribute
equally to its biodiversity.
This is clearly questionable as illustrated by tinfollowing hypotlictical sites in all of which there are
just two species present. One of the species present is .a
species of Ranunculus and the otiicr is:
J. L. Harper and D. L. Hawksworih
1. Another species of Ranunculus from the same
section of the genus.
2 . Another species of Ranunculus from a different
section of the genus.
3. A species from a difTcrcnt genus in the same
family (Ranunculaceae).
4. A species from a different family within the same
order as the Ranunculaceae.
5. A species from a different family and in a different
order (e.g. a grass).
6. A rabbit.
7. A fungus of the genus Agaricus.
8. A protozoan of the genus Amoeba.
9. An archacbacicrium.
10. A cubactcrium of the genus Pseudomonas.
This simple hypothetical scries could easily be
expanded, but is sulTicicnt to make tlic point that
any measure of bioilivcrsiiy that described all of these
sites as equal would be peculiarly uninformative,
A measure of tbc biodiversity of a site ought ideally
to say something about how different the inhabitants
VtARlNE ~ |
FR F.su WAI I K
Porifera
Cnidaria
Platyhelmiiilhes
Nemertea
Nemaloda
Rotifera
Gastrotricha
Tardigradn
Mollusca
Kamptozoa
Annelida
A rthropod a
Bryozoa
Chordata
Porifera
Cnidaria
Platyhelmintlies
Nemertea
Nematoda
Rotifera
Gastrotricha
Tardigrada
Mollusca
K a m p to z o a
Sipuncula
Annelida
Arthropoda
Bryozoa
Chordata
Placozoa
Ctenophora
Gnalhostomulida
Kino^hricha
Loricllera
Priapula
Pogonophora
Ecniura
Chaetognatha
Phoronida
Brachiopoda
Echinoaermata
Hemichordata
endemic
Figure 2. The distribution of phyla in the Anlmalia by habitat. Adapted frotn Grassle et al. (1991).
8
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Preface
arc from each other. A m easure that reflects the
increasing phylogenetic divergence o f the organisms
present at a site in the scries progressing from case (1)
to case (10) m ight be one prom ising possibility.
4. IF B I O D I V E R S I T Y IS M O R E T H A N T H E
N U M B E R O F S P E C I E S H O W CAN I T BE
MEASURED?
Three approaches arc considered by contributors to
this collection o f papers:
(a) Toxic tneeesurgs
Docs the num ber o f higher taxa, for exam ple phyla,
orders and families, provide a more appropriate
measure o f the biodiversity in a site than ihc num ber
• o f species? In m arine environments the num ber of
phyla and higher taxa is substantially greater than on
land (M ay, this volum e); indeed 13 anim al phyla arc
known only from marine environments whereas only
one is exclusively terrestrial (Grassle el al. 19 9 1;
figure 2). For those concerned with the allocation o f
resources to the global conservation o f life on Earth
this statistic at least raises the question o f whether the
present balance o f emphasis on terrestrial systems
needs rethinking.
Jf the aim o f conservationists is sim ply to conserve
the maxim um num ber o f species we m ay ask whether
the number o f higher taxa present is a convenient
quick estimator o f the number o f species in an area.
Prance (this volum e) finds that in the ncotropics only
6.4% o f the species belong to the approxim ately 40
exclusively or almost exclusively neotropical families.
H e argues that wc need to focus our attention at
the species level when assessing biodiversity . for
conservartion planning. H owever, W illiams et al,
(1994) found a very Hose relationship between the
num ber o f families present in 0.1 ha plou and the
num ber o f species present (least squares regression
= 0-913, p < 0.001). These authors point out that
com plete counts o f organisms are im practical at
present and that indirect solutions arc needed that
arc both cheap and quick. T hey used data from
families o f seed plants to make world-wide maps o f the
regional distribution o f family richness and endemism.
T h e peak richness o f families occurs in Cam bodia
which (if sampled first) contributes 53.67% of the
total number o f families. M exico (O axaca), China
(southern Sichuan) and M adagascar (north) add a
further 11.65% , 5.82% and 4,81% respectively. T he
areas with peak richness o f endem ics are strikingly
difiercnt with N ew Caledonia, south-west China and
northern Australia contributing most.
If we planned to conserve those plant com m unities
that could provide the richest diversity of pharm a­
ceutical com pounds, what measure o f biodiversity
would be the best guide? Either family richness or
endem ic richness m ight be good candidates but
species richness itself could be dangerously m islead­
ing. T h e 242 species o f Hieradum and 234 species of
Taraxacum listed in the Norwegian flora (Lid 1952)
arc better indicators o f taxonom ic traditions than of
the scale o f natural biological diversity, Pearson (this
volum e) considers the problems o f using indicator
taxa in the assessment o f biodiversity.
In considering m easurem ents through geological
time, Niklas & T iffncy (this volum e) concluded
that the taxonom ic level which yields statisucally
independent observations o f sam pling remained
unresolved for vascular plants. T h ey make the point
that, as new cvolutionarily successful characters arise
w ithin j)opulations or species, they form the basis of
radiations as the characters arc incorporated in
groups o f increasing size and ultim ately o f higher
rank. T h e com m unity biodiversity that wc are able to
exam ine at any tim e m ay therefore contain difTerenccs
between organism s that arc com parable in magnitude
but c.x[ircsscd at quite difTcrcnt systematic ranks.
There i.s a friglitcning spectre that in some comm u­
nities the relevant and com parable measure of
biodiversity may be best expressed in some groups
by the num ber o f species, but in others by the number
o f genera or even o f families,
(6) M o le c u la r m e a s u r e s
An attractive possibility for the niL-a.surcmcnt of
biodiversity is to use divergences in molecular
characters, especially the percentage o f either nucleic
acid hom ology or base sequence differences. Unlike
higher taxa which m ay be based on characters which
arc not necessarily directly com parable, the DNA and
RiVA found in all living cells can provide a basis on
which to make direct comparisons between diverse
orgauisms. I herc is a sense in i v h i c h the biodivcrsiiy
o f a com m unity is expressed as the sum o f the variety
o f genetic inform ation coded within the genotypes of
the inhabitants, A biodiversity calculus could be
envisaged for w hich we ask o f the various species
(and individuals) in a com m unity how many new
base sequences they each contribute to the genetic
vocabulary o f the w hole. Em bley el al. (this volume)
dem onstrate that the application o f molecular
technology to the study o f biodiversity can destroy
treasured icons. Som e prokaryotic groups have proved
so diverse at the m olecular level, in comparison with
eukaryotes, that new taxonom ic hierarchies above
the level o f kingdom (e.g. 'dom ains’) ha VC had to be
recognized properly to reflect the extent o f their
divergence.
(c) P h ylogen etic m e a s u r e s
Cladistics can be used to give an objective measure
o f taxonom ic distance or ‘independent evolutionary
history’ ( i e m ) using m ethods pioneered b y VancWright et al. (1991). T h e technique has considerable
prom ise (M ay, this volum e), and is examined in depth
by Faith (this volum e). T h e approach provides
inform ation that is o f especial value for the conserva­
tion o f target groups (V ane-W right et al. 1991) and in
selecting areas appropriate for their conservation
(Presscy el al. 1993) but it is difficult to see how
sufficient phylogenetic data could be generated in the
near future for this m ethod to be used to compare the
diversity o f w hole countries. In ilic most spcciosc
groups such as fungi and insects in which only 5 - 1 0 %
o f the species on Earth m a y have been described, most
o f the species in a n area will lack data suitable for
p h y lo g e n e tic analysis. R ath er than progressing up
from b u m b le-b ees to H y m en op tcr a to Insecta and so
on , an ideal ind ex o f biodiversity ought perhaps to be
ob ta in e d by p roceed in g in the opposite direction,
asking first the biggest question about diversity,
'H o w m a n y k in gd om s arc represented on a site?',
then ‘H o w m an y p h yla arc represented per king­
d o m ? ’, ‘H o w m a n y orders per pliylum?’, and so on.
T h e r e is sufficient log ic in this suggestion to elicit a
w r in g in g o f hands and even apoplexy from those w h o
m ig h t h ave to apply it.
5. A R E ALL SPE C IE S OF EQUAL WEIGHT?
T h e v a ryin g species con cepts in different groups, and
in d ee d often w ithin a single group, arc a major cause
o f uncertain ty intrinsic to all aspects o f biodiversity
research that use the species as the 'standard* unit. If
the u nit o f m easu rem en t is itself variable, conclusions
based on it have necessarily to be treated witfi
con siderab le caution. T his applies equally to discus­
sions o f the relationship between biodivcrsii) and
c o m m u n ity b eh aviou r (Baskin 1994i, to ilicorctical
m o d els (L ovelock 1992), and to indicators developed
for policy makers (R eid et al. 1993 .
T h e ‘b iological species' has been viewed as a
c o m p a r a b le entity across groups as diverse as insects
an d fungi (C laridgc & Boddy 1994', but bow do
such entities com pare when cNamincd by molrcul.ir
pr p hylo gen etic methods? H o w can biological
species be recognized w ith confidence in the majorit\
o f organism s which arc only known from preserved
m aterial? A n d h o w can a biological species concept
b e a p plied in groups that never undergo sc.xual
rep ro d u ction or parallel exchanges o f genetic
material?
T h e species c o n ce p t hi bacteria Is cspcciallv
con servative at the molecular level in comparison
w ith most oth er groups o f organisms. Diflcrcnt strains
p laced within the single bacii’riaJ species Legionellu
pneumophila have D N A hybridi/.aiion liomologirs as
different as those characteristic o f the genetic disiaiu e
b etw e en m a m m a ls an d fishes (May, tins volume).
Bacterial strains w ith 70% or more D N .* \-D N A
relatedness arc gen era lly treated as belonging to the
sam e species ( O ’D on n ell et al., this volume); on that
basis, rather few species would be accepted in some
m acroorgan ism groups, and hominids with 9 8 Vo
h o m o lo g y w o u ld certainly be regarded as conspceific! W c also w on d er h ow m any (or rather h ow few)
‘species’ o f beetles could be sustained on the grounds
th a t they possess less than 70% D N A homologv!
H o w ev e r, in D N A h o m olo gy studies in particular,
sh ould not som e a llo w a n c e be made for the size o f the
g en o m e s b eing com pared?
C au tion ts clearly required when molecular data
are used a t or n ea r the species level because o f the
discrepancies b etw een D N A - D N A hom ology and
r R N A seq u en ce d a ta for the same taxa ( O ’Donnell
et al., this vo lu m e). It w o u ld be rash to base farreaching tax on o m ic decisions o n a single typ e o f
molecular d ata at tliis time.
T h ere is an urgent need for biologists working in
different disciplines to m o v e tow ards m ore c o m p a ­
rable species concepts. N o w h e r e is this m ore im p or­
tant than in the treatm ent o f a p o m ictic ‘species’
o f IlQ w cnng plants in g en era such as Alchemilla,
Hieracium, Taraxacum and Sorbus w h ich can grossly
inflate measures o f p lan t species richness in an area.
6. SH O U L D B IO D IV E R S IT Y M EA SU R ES
IN C L U D E IN F R A S P E C IF IC G EN E TIC
V A R IA N C E?
T h e gen etic variation w ith in species ca n be o f m ajor
im p ortan ce in identifying priorities for th e con serv a­
tion o f crop plants and their wild relatives. T h e se
sam e measures can be useful in trying to ju d g e which
species h av e a sufficiently w id e voca b u lary o f genetic
information to allow them to respond to natural
selection and evolve if the e n v iro n m en t changes rather
than b eco m e extinct.
T em p leton (this v olu m e) considers the possible
ways o f mca.suring gen etic variation within species.
T hese include the p erc en ta ge o f p o ly m o rp h ic loci, the
n u m b er o f alleles, heterozygosity, the average num ber
o f nucleotide differences, the n u m b e r o f segregating
sites, and the construction o f an ailclc or h ap lo iy p c
tree. Even w ithin m a m m a ls the use o f these measures
shows that it is difficult to gen eralize ab o u t the size o f
the populations that m ig h t be required to maintain
the genetic variation o f ih c species.
A lth ou gh it w ou ld d e a r ly be desirable to include
some measure o f infraspecific biodiversity in the
overall assessment o f the biodiversity o f a particular
site, how this could be ach iev ed for more than a
handful o f species in a locality at a time eludes us.
H ow ever, the very act o f th inking ab out the problem
makes it clear that the con ce p t o f 'biodivcrsit}’ can
m ean al] things to all people. T o most geneticists it
w'ill seem absurd that a n y measure o f ‘biodiversity’
should exclude infraspecific variance: the very stuff o f
the evolutionary process by w h ich biodiversity is
made.
7. DO SO M E SPE C IE S C O N T R IB U T E M ORE
T H A N O T H E R S T O T H E B IO D IV E R S IT Y OF
AN AREA?
T h e biological diversity o f an area is much more than
the n u m b er o f species present, w h eth er or not the
species richness is discoun ted by measures o f p h y lo ­
gen etic distance or rclatedncss. For an ecologist
other dim ensions o f biodiversity are represented by
the n u m b e r o f trophic levels present, the n um ber o f
guilds, the variety o f life cycles, and the diversity o f
biological resources. T h e presence o f certain species
makes a great con trib u tion to overall species richness
because, like the oak in G reat Britain (Morris &
Perring 1974), th ey provide specialist resources for
a m ultiplicity o f oth er species (nesting sites, gallwasps, Icpidoptcra, m ycorrhizal fungi, bark an d leaf-
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Preface
in h a b itin g fungi, pests and p ath og en s, bryophytes,
lichens, oth er epiphytes, etc.). Trees, in general,
co n tr ib u te a wider range o f biological resources to a
site th a n an nu al or herbaceous plants. H o w ev er, the
role o f organism s with less obviou s ‘k eyston e’ roles,
in c lu d in g p o llin atin g insects, m utualistic sym bionts
and popu latio n -regu latin g p a th o g en s and biocontrol
agents can also h a ve clfects on the biodiversity o f a site
(H aw k sw orth et ai. 1994; L aSalle & G a u ld 1993).
M a n y ind ividu al species o f m argin al aquatic
flo w erin g plants contribute a diversity o f le a f forms
to a co m m u n ity . Batrachian species o f Ranunculus,
SagxlXaria sagiXixfoUa, and Cabomba caroliniana, bear
d istin ct su bm erged an d floating forms o f le a f and a
single species occupies two niches in a c o m m u n ity that
w o u ld c o m m o n ly be occupied by two m on om orpliic
species. In a similar vein, anim al species w ith com plex
lifc'cycles contribute extra b iological diversity to a
site. Frogs, toads and other a m p h ib ia n s contribute to
the species richness o f a site as tadpoles in aquatic
an d as adults in terrestrial patchc.s. In a sense each o f
these species contributes tw o doses o f biological
d iversity to a com m u n ity . L cp idop tcra are also
ob v io u s exam ples o f anim al species th at contribute
m ore to the eco lo g ical diversity o f a co m m u n ity than
ju s t a co u n t o f the species num bers w ou ld imply.
O n e biological measure o f the diversity o f a
c o m m u n ity must be the w ay in which it is sampled
by d iflcrent organism s that live in it (a w o r m ’s-,
b ird ’s-, or catcrpillar’s-cyc view ). D u r in g a single d ay
a w o o d pigeon m a y experience the full above-soil
biodiversity o f a forest (fine-grained sam pling)
w h ereas the sam e forest, sam pled by a caterpillar is
ex p erien ced as the ‘b io m o n o to n y ’ o f a single le a f
(coarse-grained sam p lin g). T h e use o f tlic con ce p t o f
gra in to describe an o rgan ism ’s eye v iew o f the
d iversity o f an en viro n m en t is d u e to Robert
M a c A r th u r (e.g. M a c A rth u r & C onnell 1966). Even
i f w e confine our measure o f biodiversity to species
richness an d forget an y discounting for differences in
p liylo gcn ctic distances or ecological con trib u tion there
rem ains the fact that, aX xhe 'g r a m ' o f communiXy diversity
sam pled by us, som e o f the various species present in a
c o m m u n i t y arc a b u n d a n t and others are very rare.
T h is issue is especially acute for microbial groups; in
m o st instances the largest num bers of individuals at a
site will be the microorganism s which are not only
u n seen b ut often also u nculturable (E m b lc y ei a i , this
v olu m e; O ’D onnell eX a l , this volum e).
’E q u itab ility ’ is therefore clearly an elem en t o f
‘biod iversity’ and is on e aspect that has been built
into formal m a th e m atica l indices, for ex a m p le tlic
S h a n n o n Diversity In dex and S im p s o n ’s Index that
arc d efin ed an d illustrated in ecological texts (e.g.
B ego n eX ai. 1990) e.g. S im p so n ’s In dex
1
T .P f
w h ich is calculated by determ ining, for each
species, the proportion o f individuals or biom ass tliat
it contributes to the total in the sam p le, i.e. the
proportion is P i. For the iih species w here s is the total
num ber o f species in the co m m u n ity (i.e. its richness).
T h e index suffers for some purposes because it is
possible for a species-rich but inequitable com m unity
to have a low er index than one that is less species-rich
but highly equitable.
Such an index, although it may be useful for a
partk u lar group (e.g. all vascular plants or all insect
species at a site) is difficult to apply and perhaps
largely meaningless if it were to be applied to the
mixture o f systematically diverse groups that forms
m ost natural communities.
8. ARE T H ER E USEFUL IN D IC A T O R S O F
AREAS W HERE B IO D IV E R SIT Y IS HIGH?
A lthough m uch is m ade o f the need to focus nature
conservation on areas o f high biological diversity,
choices are usually made on quite different grounds.
Particular taxonom ic groups appeal to the public
and tlicir conservation attracts political and financial
support. T h e risk o f losing a furry o r k a th e r y anim al
or a plant with appealing flowers will presumably
continue lo d om inate most ju d gem ents about nature
ronscn-ation raihcr than any formally considered
scicncific measures o f biodiversity. T his will certainly
continue to be the case so long as science fails to
develop appropriate measures for more rational (less
em otional) decisions.
Ideally, comprehensive biological inventories o f sites
( a t b is , sec below), will be needed if full quantitative
mca.'inrcs o f biodiversity arc to be used in making
coiiscivation decisions. However, these arc unlikely to
be obtained from more than a handful o f sites in the
foreseeable future. W c need therefore to look for simpler
yet oljjcctivc ways o f predicting where high biodiversity
will occur. Arc some taxa particularly good indicators o f
com m unity biodiversity? Might it be that, by chance,
tliosc mammals, birds and plants (sucli as orchids) that
appeal so strongly lo the lover o f ’wild-lifc happen to live
in (and arc therefore good predictors o f) areas o f
particularly high biodiversity? O r arc there other often
unstudied yet easily observed groups such as the larger
lichens tliat have the most potential in this regard?
Pearson (this volume) considers the factors that could be
used in selecting appropriate indicator taxa and
H am m ond (this volume) assesses the practical steps
that can be taken to estimate biodiversity in the most
speriosc groups.
1 he most daunting problems arise in making an y
measure o f biodiversity in the soil ( O ’D onnell eX al.,
this volume) where there m a y be more than 10®
microorganisms per gram o f soil, and in the sea where
microscopic algae m ay have average densities o f 10®
cells per litre (Andersen 1992) and a 1 cm marine core
m a y contain 4 x 10^® bacterial cells (E m bley el a l ,
this volume).
Reid eX a l (1993) discuss biodiversity indicators that
m ay be o f value to policy makers in establishing
conservation priorities, but these have to be seen
against the backcloth o f questions raised here. T h e
indicators so far proposed m ay be o f value in the
conlc.xt o f particular specified groups (e.g. wild plants
Prtface
and their relatives), but are unlikely lo reflect tlic total
biodiversity in an area.
9. CAN TH E E X T E N T OF B IO D IV E R S IT Y IN
T A X O N O M IC G R O U P S OR C O M M U N IT IE S BE
E ST IM A T E D BY E X T R A P O L A T IO N ?
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11
There are two significant obstacles internationally
to progress in the scientific study o f biodiversity: (i)
the inadequate size and inappropriate location o f
the workforce with the appropriate biosystem atic
skills; and (ii) the state and location o f the collections
and literature database (M ay. this volum e). T h e
m ism atch between the m agnitude and priority o f die
task and the resources available has to be addressed at
the highest international levels (Janzcn 1993).
A major challenge o f biodiversity science is to develop
firmer estimates o f species numbers. May (tliis volume)
considers the conceptual problem s in current
approaches to estim ating the total numbers of species
We iliank Professor W. G. Clialoocr and Dr N .J . Stork for
in different groups. T h e highest degree o f probability
helpful suggestions of possible contributors, Professor V. H.
I Icywood for access to his correspondence with Dr E. A. Norse
exists where different approaches lead to broadly
relating to early usages of ilic term 'biological diversity’, and to
sim ilar num bers, but insufficient data sets, especially
Dr
Norse for supplemental information. Mrs E. Whcatcr
from tropical and m arine habitats arc a major
conducted
the Biosis database search which formed the basis of
hindrance to progress in the developm ent o f protocols.
figure 1. Especial thanks arc due to Julia Neary of the Society’s
Theoretical aspects o f tlic use o f extrapolation to
Editorial O/hcc for shouldering the major part of the
measure species richness arc critically exam ined by
correspondence with conlributon and referees.
Colwell & C oddington (this volum e) with particular
reference to the use o f species accum ulation curves,
R E FER EN C ES
param etric m odels o f relative abundance, and noiiparamctric m ethods. T h ey also explore the problem
Andersen, R.A. 1992 Diversity of eukaryotic algae. fltWri
1, 267-292.
o f estim ating com plem entarity from samples and
propose a m easure o f (his.
H.iskin. Y. 1991 Erologiscs dare to ask: how m uch dors
dhcrs'ny m .itler? Sfifixt, AVasli. 264, 2(12 -203.
'I'he com panion contribution o f H am m ond (tliis
Begon,
M., Harper. J.L. &. Townsend, C.R. 1990 Ecology:
volum e) focuses on the practical aspects o f the
indhidmU,
papulations and communitus. Oxford: Blackwell,
estim ation o f species diversity in spcciosc group.s,
Claridgc, M.F. & Boddy, L. 1994 Species recognition
and is based on extensive data sets from the U .K . and
J)stems in insects and fungi. In The identijicalion and
Indonesia. He concludes that sim ple ratios o f species
eharaeterization of pest otianisms (cd. D, L, Hawksworth),
from taxon to taxon, focal group to inclusive group,
pp. 251-274. Wallingford: CAB International,
site to site, sam ple to inventory, and across spatial
Eldrcclgc,
1993 here the twain meet: causal intersections
scales p ro\id c the firmest base for cxirapolaiinn, 'fh r
bcturrn the genealogical and ccologir.nl realms. In
choice o f botli focal groups for c.\trapolaii\ c purptjses
SydfmatUs, Kotogy. and the biodiiersiiy crisis (cd. .\. Eldand sam pling m ethods lo obtain reliable corrtparablc
pp. 1-14. New York; Columbia University Press.
Crasslc, J.F., Lasscrrc, P., McIntyre, A.D. &. Ray, G.C.
data sets is critical, and there needs to be an awareness
1991 Marine biodiversity and ecosystem function. Biol.
of, for exam ple, the interplay between patchy
Inlernat.,
Special tssue 23, 1-19.
distributions and sam ple dim ensions.
Hawksworth,
D.L., Lodge, D.J. & Ritchie, BJ. 1994
A major stim ulus to the im provem ent o f the
Fungal and bacterial diversity in the functioning of
scientific base o f extrapolative approaches would be
tropical forests. In Ecosystem function and hiodirersily in
the realization o f ja n z e n ’s (1993) proposal to establish
tropical forests (cd. G. S. Orians & R. Dirzo), New York:
a series o f sites which have an A ll-T a.\on Biotii\ crsity
J. Wiley. (In the press.)
Inventory ( atbi). T h e efficacy o f sampling and
Janzcn, D.II. 1993 Taxonomy: universal and essential
extrapolative procedures could be rigourously tested
infrastructure for development and management of
against known biota at such sites. The lack of a
tropical wildland biodiversity. In Proceedings of the AW ny/
LW'EP expert conference on biodiversity, Trondheim, Norway (cd.
com prehensive inventory o f all groups o f die biota for
O.
T. Sandland & P.J. Schci), pp. iOO-112. Oslo: M NA.
any site in the world, even in the U .K ., is a major
La.Sallr,
J. & Cauld, I.D. 1993 Hymcnoptcra; their
obstacle to develop in g extrapolative methods. Yet it is
diversity,
and thcif impact on the diversity o f odicr
just such m ethods that will have to becom e the norni
organisms.
In Hymcnoptcra and biodiversity (cd. J. LaSalle &
in site assessments because o f the im practicability o f
I. D, Gauld), pp. 1-26, WalJinglbrd.' CAB International.
routinely attem pting com prehensive inventories.
Lid, J. 1952 Norsk flora. Oslo: Norske Samlaget.
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(cd. G. O. Bamey), pp. 327-332. Harmondsworth;
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cally sound and testable answers. By openly posing
Lovelock, J.E. 1992 A numerical model for biodiversity.
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'
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C onceptual aspects of the quantification o f the extent
of biological diversity
R O B E R T M. M A Y
Department o f Zoology, University o f Oxford, South Parks Road, Oxford O X l 3P S , U .K .
CONTENTS
fA O E
1. Introduction: from genes to ecosystems
2. H ow m any species have ever lived?
3. Estim ating contem porary species numhcrs
(a) Terrestrial insects
(t) M arine m acrofauna
(f) Fungi
(d) M icroorgnnisius
(r) Parasite diversity
{ / ) Differences betw een biodiversity on land and in the sea
(_f) C cograpliiral distrilniiiuns and ranges
{h) Sibling species
4. Q uantifying the 'taxonoinic distinciivcnrss* <>f a species
5. T he workforce and the database
References
13
14
15
15
16
16
16
16
16
17
17
17
18
19
SU M M A R Y
T his paper begins by asking tn what extent im m h n s o f species are an adequate measure o f biological
diversity, either locally or globally; both for evolutionary understanding anti for practical applications
biodiversity m ay often be better quantified at lower or higher levels, from genes lo ecosystems. The
subsequent discussion, how ever, focuses on species, anti discusses questions tliat arise in estim ating how
m any species there have ever been, how many there currently arc in various taxonom ic groups, and how
we m ay quantify the differing degrees of'in d ep en d en t evolutionary history’ or 'taxonom ic distinctive­
ness’ in different spccics or groups. I conclude with opinions about how the practical task o f identifying
and recording spccics diversity m ight be better m anaged.
1. IN T R O D U C T IO N : F R O M G ENES TO
E C O SY ST E M S
B iological diversity exists at m any different levels,
from the genetic diversity w ithin local populations
o f a spccics, or betw een geographically distinct
populations o f the sam e species, all the w ay up to
com m unities or ecosystem s.
D epending on the con text, any one o f this nested
hierarchy o f levels can be o f pi edom inant im portance.
A t the most fundam ental evolutionary level, tingenetic diversity w ithin species is the raw stuff upon
which evolutionary processes act. O n shorter timrscalcs, such genetic variab ility enables a species to cope
with old and new pathogens, environm ental fluctua­
tions, and so on. W c still lack a clear understanding of
how the long-term survival o f m any spccics is likely to
be affected by recent and severe reduction in the sizes
o f their populations, cither in the wild or as ‘rescued’
populations in captivc-brecding programmes; L andc’s
‘500 rule’ was never intended as more than an initial
and crude guess (Landc 1988).
At the opposite extrem e, wc d o not have to embrace
the wilder poetic flights o f the Gaians to acknowledge
that ecosystems can usefully be regarded as supraorganisms for m any discussions o f the way biological
and physical processes entw ine to m aintain the
biosphere as a place w here life can flourish. For
m any discussions o f the role o f plants in cloud
formation and structure, or in water or carbon
dioxide balance more generally, w e d o best by
dealing with functional aggregates. T he sam e is true
of discussions o f soil form ation and m aintenance,
where a diverse array o f functional com m unities o f
organisms (rather than individual species) are the
effective units to be studied.
Alongside the sweep from intrapopulation genetic
diversity to ecosystem diversity there lies another rich
spectrum o f levels, ranging from interpopulation
diversity or races w ithin a defined spccics, through a
1 4
R
.
M
.
M
a
y
Quanli/j/iitg
A i W
i W
i i / y
hierarchy o f taxonom ic levels from genus (o kingdom.
Q uantification o f diversity at these distinct taxonomic
levels is different from the hierarchy that ascends from
species tlirough cam niunitics to ecosystems. T axo­
nomic hierarchies generally emphasize evolutionary
origins and relationships, often against the back­
ground o f the 600 m illion year (M a), or longer,
span o f the fossil record; sp ecics-coin n iu n ityccosyjtcm hierarchies tend to em phasize ronteniporary ecological similarities and differences in difl'ercnt
environmental and geographical settings.
In short, biological diversity can be (|uantified
in m any different ways, at m any different levels.
Com m only, however, w e choose numbers of species.
This is sensible, both for practical purposes and for
more fundam ental reasons.
Take the practical reasons first. Eflcelivc action
needs m oney, and m oney ultim ately dejicnds on
widespread support am ong the general [nililic. It is
easier to recognize ‘biodiversity’ immanent in
species - especially charism atic vertebrates or colour­
ful p la n u - t h a n in gene pools or ecosystems.
At a more operational level, wc caii preserve
endangered species, either in captivc-brecding p ro­
grammes ex silu or, when possible, in situ. Preserving
an endangered species* gene pool is not only a
more abstract concept, but it involves a range o f
unanswered scientific questions. T o d a y ’s populations
o f Pcrc D avid’s deer arc genetically greatly im pover­
ished, yet seem healthy and viable. H o w would they
fare if we could perform the imaginary experiment of
reintroducing them into their original, human-free
environment? Past whale bottlenecks mid present
cheetah hom ozygosity present parallel questions
which challenge contem porary understanding.
At the opposite extrem e, preserving ecosystems
rather than species is sim ply more difficult (although
correspondingly more im portant, in my opinion).
Preserving ihe Guam rail in captivc-brccding pro­
grammes is one thing; preserving Guam's ecosystems
is another. More generally, operational assessment at
the level o f species survival is relatively straight­
forward, whereas assessment o f the m eaning of
observed changes in, for exam ple, the relative
abundances o f species in an ccosyslcni i.s fraught
with uncertainty and am biguity (witness the continu­
ing controversies about the naturalness or otherwise of
Acanthasttr outbreaks in coral reef comniunitics, or o f
the role o f fire in m any ecosystems).
For these reasons, the bulk o f this paper deals with
conceptual issues surrounding the asscssitu nt of how
many species there have ever been on earth, liow
many there arc today, and how wc might tjuanlify the
relative 'taxonom ic distinctivcncss’ o f different species.
In so doing, I follow m ost o f the other authors in this
volum e. Before proceeding, however, I stress some
concrete examples of practical problems that arise
from too mindless a focus on simple species counting.
A variety o f factors, including concern for the
conservation o f wildflowers and insects, is leading to
some changes in agricultural practice in parts of
Britain. These include wider field margins, where
trials have shown lliat sow ing a 2 m perennial grassy
sward wiih a wild/Iowcr mix will establish a wccdfighting com bination that controls and chokes
troublesom e annuals like sterile bromc and cleavers
. . . the border will also harbour insects which cat
cereal pests’ (Anon 1994). T his them e is expanded by
Sm ith et al. (1994). T h e use o f currently available
com m ercial w iid/low cr seed mixtures for these
purposes, and also for distribution along road
margins and so on, is increasingly advocated both
for the practical purpose o f weed and pest control, as
just noted, but also on general grounds o f enhancing
or restoring biodiversity. U nfortunately, much o f this
praiseworthy but naive cntliusiasm for biodiversity is
bascti on a V ictorian-chocolatc-box-top vision o f
wildflowers in the British countryside. T h e British
cou n liysid c in fact exhibits great local variation, and
tliflcreni regional populatioii.s o f particular wildflowcr
species can show large differences in m orphology and
gcneiie com position (A. T. Jones, private comm unitation ). Restoration programm es need to take
aceoim i o f sucli local variability, and to ensure it is
con scised . T his requires working with local farmers,
using bites o f Special Scientific Interest (S SSI’s),
nature reserves, and rich m eadows. Elevated Per­
sonages scattering com m ercial wildflowcr mixtures
from speeding cars along road margins may make
good m agazine copy, but w hether the long-term
contribution to plant diversity in Britain is positive
or neg.iiivc is not dear.
Anotlicr instance o f w cll-intcntioncd practice,
guided, however, by visual rather than scientific
con.sidcrations, is the widespread recent planting o f
hedges along newly widened roads in Britain. Such
hedgerow preservation is praiseworthy, but usually
uses non-native hawthorns and other alien species,
m ainly from eastern Europe (where seed-coltccting
costs arc significantly low er than in Britain). But there
is evidence (Jones 1994) that alien forms perform less
well than native ones as hedgerow material, probably
owing to poorer ecological adaptations to local
environm ents, tic r c is an c.xarnplc where, visual
impressions to the contrary, tlie interests o f biological
diversity arc not being well-served (and the long-term
cost.s o f preserving these Iicdgcs may well offset the
initial savings).
Ihc- basic m essage o f this extcasivc introduction
is that biological diversity has m any dimensions.
Siiim narizing it by a sim ple species count, as is done
in tlti- rest o f my cliapicr, can often obscure
conceptual understanding, and can som etim es do
harm in practice.
2. HOW' M A N Y SPE C IE S H A V E EV ER LIVED?
f
As a background to quantifying present species
richiir.s.s, it is useful to c.xaininc the fossil record o f
plants and anim als over the past 600 M a or so, since
the Cam brian. Estimates o f the lifespans o f species in
the fo-s-ril record, from origination to extinction, arc
m ainly indirect; the best are based on computer
analy.scs o f large numbers o f cohorts o f fossil genera
(R aup 1978), M ay et al. (1994) have sum marized a
variety o f such estimates, wliich suggest the average
Quantifying biodiversity
K. M . M ay
15
species’ lifespan is around 5-^10 M a. There IS,,
fishes. In short, one o f the basic conceptual issues in
how ever, m uch variability both w ithin and am ong
quantifying biological diversity is the extent to which a
groups. T hus the characteristic lifespan of m am m al
species does or docs not represent the same unit o f
species in tiic fossil record is rougliJy 1 JVIa, whereas
evolutionary currency for a bacterium , a protozoan, a
there arc suggestions that insect species m ay be
mite, and a bird.
*
unusually long-lived, at least in north-tem perate
regions (C oope 1994; Labandcira & Scpkoski 1993).
3. E S T I M A T I N G C O N T E M P O R A R Y S P E C I E S
Even w ithin m arine invertebrates, for which Raup
NUMBERS
(1978) assigned an average species lifespan o f 11 M a,
there are significant variations from group to group;
Other papers in this volum e deal with estimates
M esozoic am m onoids, for instance, have an average
o f species numbers, cither for particular groups
sp ecies’ lifespan o f only I - 2 M a .
in particular places, or more generally (see also
Sepkoski (1992) suggests that species diversity in the
Hamm ond 1992; M ay 1994). So what follows is only
fossil record has, very rouglily and with severe
a sketchy guide to w hat I see as some o f tlic
fluctuations, increased linearly over the 600 M a o f
conceptual problems. I have chosen to list these
the Phancrozoic. I fw c com bine this with an estimated
conceptual issues under the heading o f particular
species’ lifespan o f 5 - iO M a before extinction, wc
taxonomic groups, rallicr than more abstractly.
conclude that roughly 2 -4 % o f all species of plants
and anim als ever to have lived arc alive icxJay.
(a) T e r r e s tr i a l i n s e c ts
A round 95% o f the roughly 250 000 species in the
fossil record arc, how ever, m arine anim als (Scpkoski
Erw ins (1982) provocative assessment of numbers
1992; R au p 1976). T his contrasts greatly with the
o f insect species, by a chain o f argum ent anchored to
situation today, where on ly 15% or so o f recorded
numbers o fb c c ilc species in the can opy oT particular
species o f plants and anim als arc found in the sea;
tropical tree species, brings several conceptual issues
most (56% ) arc terrestrial insects. So conclusions
into sharp focus.
drawn from average patterns in the fossil record cotild
First, it raises qiirsiions about extending com pari­
be m isleading. A lthough the (bssil iccurd lor ii.sccis h
sons from one gcograpliical location to another. Even
m uch m ore fragm entary than for shallow -w alcr
if roughly 20% of canopy beetles are effectively
invertebrates, the indication is that insect diversity
specialized to Luehea seemannii at a particular study
has risen steadily - very roughly, linearly - over the
site, how do w c k n o w ilicse sam e beetle species do not
past 450 M a or so (L abandcira & Scpkoski 1093). If
effectively specialize on other tree species at other
wc take 10 M a as the average lifespan o f an in.scri
sites? Or that /,. sremanmi has a different effectively
species, from origination to e.xiinctioii, w c would ilius
specialized beetle fauna clscwlierc? Examples which
to n clu d c that at least 5% o f all plant and anim al
illustrates such corn plications, atid cut across any
species arc alive today; this figure could be larger
sirnplc ‘scaling-up’, arc discussed by Thom as (1990)
i f average insect species* lifespans exceeded lO M a
and i\fay ((990a),
and/or if insect species’ diversity increased faster than
Second, a related question is w hat we mean by
linearly throughout the M esozoic (M ay tl a(. 1 9 9 4 ) .
'effectively specialized', and how wc assess it (M ay
T o put this in a different (and m ore trenchant) way,
1990a). W hat proportion (p,) o f the beetle species
the fossil record, being so d om in alcd by marine
found on L. seemannii is found on t otiicr tree species?
invcrtcbratc.s, may be unrepresentative of the history
What general guidelines can basic ecological theory
o f life on earth over the past 400 M a or so, when
offer us? (Not many!) Even relatively simple,
terrestrial insects m ay have dom in ated (Briggs 1994).
technical questions have received surprisingly little
In draw ing com parisons across geological epochs,
attention: to what extent will sampling problems
a n d - e v e n m o r e - a c r o s s taxonom ic groups, we must
obscure efforts to assess p, from comprehensive field
worry w hether w c are com paring like w ith like. There
studies, and how large need samples be so that
certainly arc problem s with 'taxonom ic inflation’ over
ecological signals arc not overwhelm ed by sampling
the years; what was a genus to Linnaeus miglit be a
noise.
famJJy, or even an order, today (Scpkoski 1992). These
Third, to what extent can we trust figures for
instabilities, applying differently to different groups,
canopy beetle species to be broadly representative of,
and dep en d in g to som e degree on the different
say, ants? H am m ond discusses these issues more fully
attention given to different groups, create problems
elsewhere in this collection (sec also H am m ond 1992,
w hen w c try to m ake com parisons or to draw inferences
1994; M ay 1990a).
about the history o f particular groups o f species from
Fourth - and to sound for the first time a tocsin that
their superspecific taxonom y (Patterson & Smith
will ring throughout this s e c t io n -t o what extent arc
1989). Such m ethodological differences am ong taxo­
Erwin s extrapolations likely to be consistent with the
nom ic groups show up in other fundam ental ways. For
fraction o f species in his collections which arc
exam ple, Sclander (1985) has observed that different
previously unrecorded (remember, Erwin’s samples
strains o f what 'is currently classified as a single
have not yet been 'keyed o u t’).? Erwin’s chain o f
bacterial species, Legionella pneumophila, have nucleo­
argument suggests 30 m illion species o f (tropical)
tide sequence hom ologies (as revealed by DN A
insects. But only around 1 million insect species have
hybridization) o f less than 50% ; this is as large as the
been recorded. Thus, on average, we m ight expect
characteristic genetic distance betw een m am m als and
only around 3% o f Erw in’s as-yet-unidcntificd beetle
16
R , iM. M a y
Q uantifying btodiversily
species (or less than 40 o f his 1100 4- canopy beetle
species from L.
to be already k n o w n . 1 will
be am azed if this is (he case (and I would chance a
guess that 30% is more likely). T his form o f ‘check'
seems to me to be an im portant constraint on any
extrapolation or indirect assessment o f species rich­
ness. O f course, the fraction o f a newly studied flora or
fauna that has been previously recorded is likely to
vary greatly from place to place and group to group
(H am m ond 1992, J994 and tins volum e). And these
kinds o f crude num erical estim ates o f fractions
previously recorded ignore com plications that can
arise from significant disparities in the relative
abundances o f different species. But even so, the
most extrem e o f such figures from recent studies rarely
exceed 50% new species (M ay 1994).
(&] M a r i n e m a c r o fa u tta
Grassle & M aciolck (1992) proposed .i g lo b a l total
o f 10 m illion or more m arine molluscs, crustaceans,
polychaete worms and other bcnthic macrofauna.
These estim ates were extrapolations from ‘box-core’
sam ples from the ocean floor. Because fewer than
200 000 such m arine species are currently recorded,
this estim ate would sccin broadly to suggest 2 V d or
fewer recorded species in sam ples from really new
places; no such extrem e figures have been found (M ay
1992, 1993; but sec Poore & W ilson 1993). Tliis re­
echoes the point m ade in the preceding paragrapli.
Grassle & M aciolck’s (1992) iiilliiem ial and
stim ulating paper raises another important concep­
tual issue, relevant to biodiversity a.sscssinent. 'I'hcy
suggest that the underlying cause o f the great occaiifloor species richness which they project is, first, that
the Input o f nutrients to sedim ents is inherently
patchy and ephem eral and, second, that scdim cntdwcllers them selves create sm all-scale disturbances
which further increase environm ental heterogeneity.
Such spatio-tem poral heterogeneity and disturbance
is recognized by ecologists as a powerful prom oter o f
diversity. All this is, they suggest, com pounded by the
lack o f barriers (com pared with terrestrial environ­
ments) to long-distance dispersal, which allows distant
migrants to contribute to reshuffling patterns o f local
diversity. M y worry about these ideas is that, if
long-distance m ovem ent is an im portant cog in the
m achinery m aintaining overall diversity, then you
cannot extrapolate a 'local' rate o f adding species
with area (as Grassle & M aciolek do) beyond the
characteristic distance scale on which the dispersal/
diversity m echanism operates. M ore generally, any
kind o fscalin g-u p or extrapolation should be based on
a clear understanding o f the distance scales w hich
characterise underlying ecological processes. This will
often be an unhelpful counsel o f perfection, but it
is nevertheless a conceptual issue which I think
invalidates several estim ates based on such scaling-up.
(f) f u n g i
Another interesting and dram atic upward revision
is by H awksworth (1991) for fungi. Currently some
70 0(10 species o f fungi, senju Into, arc recognized. But
for B tiiain’s com paratively well-studied spcdcs of
lungi .ind vascular plants, the ratio is around 6 : 1. If
this ratio applies globally to the quarter million or so
plant species, wc arrive at an estimated 1.5 million
species o f fungi. And this estimate is in some ways
conservative; for exam ple, it has not allowed for fungi
associated wiih Insects and other animals.
For one thing, this estim ate implies that, on
average, about 95% o f the fungal species found in a
newly studied region should be previously unrecorded
ones. In fact, the proportion o f new species found in
most of such studies is typically 15-30% , and rarely
higher. T his proportion, however, depends to some
extent on the Intensity and Iciigtli o f time over which
studies arc conducted; Hawksworth (1993) cites
trojiiLal exam ples where 5 0 -7 0 % o f even the larger
fungi have proved to be undescribed. Here, again, I am
appealing to the check o f any extrapolated estimate
against secure facts about wliat fraction o f species in
prcviou.sly unstudied areas arc new to science.
For another thing, HawkswortlTs estimate raises
questions about extrapolating from Britain, which
from an Australian viewpoint is a dam p and fungal
place, to other regions. This issue is covered m o re fully
by H am m ond (lliis volume; see also Thomas 1990).
(d) M i c r o o r g a n i s m s
I he many questions surrounding the hlological
diversiiy o f m icroorganisms - a group whieh created
the oxygcii-rieh biosphere, and which plays a crucial
role in inaintaining soils and oilier rcosvsietn services
— are discussed more fully cisewhcrc in this collection
(sec also H am m ond 1994; M ay 1990a, 1994). To
my mind, the central conceptual issues are (he
operational differences between definitions o f a
species for som e groups o f microorganisms (especially
viral '(|uasispccics’) versus, say, birds and mammals.
{«) P a r a s ite d i v e r s i t y
By the same token, it could reasonably be argued
that for each species o f nictazoan or vascular plant
there is at least one specialized species o f parasitic
nem atode and protozoan, along with at least one
species of bacterium and virus. Thus any estimate of
plant and anim al diversity can be multiplied by five,
at a stroke. Even if wc relegate bacteria and viruses to
a dillcrent category o f biodiversity, we still have a
m ultiplicative factor of three. I am unsure what the
conceptual or practical consequences arc. Certainly
there will be no lobby to save threatened nematodes
and protozoans.
( / ) D ifferen ces b e tw e e n b i o d i v e r s i t y on la n d a n d in
the sea
'
As noted earlier, only 15% or fewer o f recorded
spccic.s inhabit the marine realm. But the sea is
increasingly represented as we move to higher
taxonom ic levels, from genus lo phylum. Indeed, at
the level of phylum , or basic body-plan, diversity is
Quantifying biodivm ily
much greater in the sea (32 o f 33 phyJa in titc sea,
versus 12 of33 on land, by one dossiricalion; or, at the
level of class, 73 animal classes in the sea, 35 in
freshwater, and 33 on land (Nicol 1971)). Possible
reasons for this are listed by May (1994), bul there is
no generally agreed understanding. This is a major
‘conceptual issue’.
(j-) G eo g ra p h ica l d is tr ib u tio n s a n d ranges
Implicit in several of the questions raised above arc
comparisons among the characteristic geographical
ranges of dilTcrcnt species and diffcrcni groups.
Fenchel (1993; see also Hammond 1994) has recently
suggested t h a t - a t (cast in the sea, and possibly
more g enerally-sm all organisms (roughly 10'* m
and below) may typically have wider geographical
distributions lhan those of inicrmcdiate size (as
e.'templiftcd by insects and niiics). He has docu­
mented this for some marine protozoans and
invertebrates, and conjectures that it might c.splain
Ihe humpcd-shapc distribution of numbers of species
versus physical size, found in studies of particular
groups and more generally by .May tl970). ifFcnclid
IS right, this could explain win llie total iHiinlni
of protozoan spcdcs is an onlir-or-magniinde less
than the global number of iiivcriebraic species, yet
typically more protozoan spcdcs than iiivencbraic
species are found in any one pond; the protozoan
species have larger geographical distributions than the
invertebrate species.
Here again is a central ccniogical and cvolutionarv
question, which clcarU rclan-s to many of the
questions about scaling.up and extrapolation that
are raised above, and by other authors in this
collection. Lacking centralized inventories and
codifications of such inrorniaiion about ranges,
across diJferent ta.xonomic groups and dilfcrcnt
characteristic sizes of individuals, wc arc oidy just
beginning to deal with tlicsc qiirsiions.
(A) S ib lin g sp e c ie s
Knowhon (1993) has rccciuly surveyed cvldciiciwhich suggests sibling species - species which arc
difficult or impos.sible to distinguish based on tlieii
available morphological characters - arc common in
all major marine groups and habiiats. She argues thai
such widespread misideniiftcaiioii of a group of truly
distinct species as being a single species arises partly
from inadequate study of morphological features and
partly because such groups diverge in habitat, life
history, and chemical recognition systems without
parallel divergence in morphology. As reviewed by
Knowlton, a large number oi abundant, well-studied,
and/or economically important taxa have recently
been shown to be complexes of sibling species.
The sibling species phenomenon clearly poses
problems both for taxonomic research on certain
groups, and for ecological and evolutionary under­
standing that is based on such taxonomy. As
Knowlton (1993) writes: 'consider a world where
birds are only occasionally seen alive by the handful of
Phil. Tratis. R. Soc. bond. B fl994)
R. M. May
17
scientists who study their alpha taxonomy. They
arrive in museums cither as colourless corpses in jars of
formalin, or as skeletal material alone. The bills arc
often delicate structures whose normal shape cannot
be reliably inferred from preserved, material. Growth
IS often indeterminate, and weather can affect both
the size and shape of the skeleton. Field observations
are generally limited to a few hours a day, and
identification keys, where they exist, generally lack
information on colour pattern and bill shape.
Communication between individuals probably occurs
via phcromoncs, as there arc fcw auditory or visual
displays. Contact clicmicals or micrometcrcological
conditions appear lo shape preferences for nesting and
feeding sites.’ Undcriining the consequent problems,
she asks whether, under these circumstances, wc would
not see Darwin’s finches or M acArlhur’s warblers
as single species, with obvious implications for our
ecological understanding.
4. QUANTIFYING THE ‘TAXONOMIC
DIST/NCTIVENESS’ OF A SPECIES
As wc move rrniii the furrics and feaihcrics, down
through the inminierabic species of insects, and on
down to bacicri.T and viruses, sentimental concern
docs not merely wane. It changes sign. 3\'c mourn
extinction of bird and mammal species, whereas we
arc about to celebrate the deliberate extinction of the
smallpox virus. 'I'hcsc arc facts, but they lack any
conceptual underpinning.
Vanc-Wright t l al. (1991) were the first to suggest
that, for conservation purposes, we should quantify
the relative values wc attach to different species. The
scheme they proposed attempts, in essentials, to assign
an objective value to the ‘taxonomic distinctivcness’ or
degree of ‘independent evolutionary history’ (IF.H)
that is vested in a .given species. Such a weighting is
made relative lo other members of a group. Although
curreiilly there is much activity in this area, no one
(to my knowledge) lias yet made a st.irt on extending
IF.U talualion a c r o ss disparate taxonomic groups.
'i lic tu.atara {.S/ihenodon), for c.xamplc, is a large,
iguana.like reptile which is the sole survivor of a
groujt that flourished in theTriassic. Today it survives
as two species on a few islets off the coast of New
Zealand. The tii.al.ara branched off froni the main
stem of the reptile’s phylogenetic tree so long ago, and
is so distinctive, tliat il comes close to being a tsvospecics subclass of its own (Daugherty t t al. 1990).
How do we value tlic tuatara against any other species
of reptile? At one democratic extreme, we could
regard all species as equally important, each a unique
evolutionary product; in this view, tlic tuatara is no
more important than any other among the roughly
6000 species of reptiles. At the opposite extreme, we
might give equal weight to each 'sister group' in the
phylogenetic tree of reptiles; on this basis, the two
species of tuatara would be weighed equally with the
sum of all 6000 other reptile species. Vane-Wright ei
al. (1991) propose a sensible middle way, based on the
topology of the phylogenetic branching diagram,
which seeks to value species according to some
■
■
18
R. M. M ay
Quantifying biodioersity
rough m easure o f ihcir taxonom ic disiitu tivcncss or
lEH, and which gives results interm ediate between the
two extrem es ju st outlined {the tuatara, on this
schem e, would represent som ething like a lew percent
o f the taxonom ic distinctivencss found am ong reptiles,
interm ediate between the 0.03% o f the dem ocratic
extrem e and the 50% o f the opposite extreme- M ay
1990^).
'
’
Various refinements o f these basic ideas arc being
actively pursued (Faith 1992, 1993, this volume;
W illiam s et at. 1991; Crozicr 1992). Ideally, if we
had som e quantitative m easure o f the branch lengths
w ithin the phylogenetic tree o f the group in question,
w c could unam biguously quan tify the am ount o f iF.n
vested in a species, by adding up the lengths o f the
branches which connect it to the base o f ihc tree and
appropriately discounting all shared bram hcs (Faith
1992, 1993; M ay & N ee 1994). I f we cotdd preserve
only, say, half the spccics in the group, ihr optim um
choice would then be found by nia.ximizing tlic
sum m ed branch length that was prcscivcd. H ow ­
ever, generally wc have only tiic topology o f the tree,
w ithout quantitative measures o f the various brancli
lengths; in this case, the best procedure would be to
assign the branches the lengths that arc, oti average,
most likely for this particular topology, and then go
forward on this basis. Such a procedure will, o f course,
often in fact be siiboptim al, because the underlying
evolutionary tree differs from the statistically
‘expected’ one. In general, how ever, c.\tcnsivc
theoretical sim ulations o f choices m ade on a topolo­
gical basis, from artificially generated tre e s whose
underlying branch lengths are known, suggest that
values assigned in this way arc close to the 'true' ones
(M ay & N ee 1994). U ltim ately, our question is how
m uch o f the lEH within a group will be preserved if wc
can only save, say, 10 o f 20 spccics? T h e simulations
referred to above suggest tJiat, for the 10 o f 20 cases, we
can on average preserve 82% o f the group’s tEH ifw c
have quantitative information about branch Icngtlis,
77% if we have only topological infbrmatittn about the
branching structure o f the phylogenetic tree, and 63% if
w e m ust choose at random (M ay & N ee 1994).
R eal situations will ob viously involve m any other
im portant considerations, in clu d in g other measures of
ihc relative values o f spccics (for exam ple, in preserving
‘ecosystem services’, or in possessing unusual beha­
vioural or ecological properties that arc not captured
by crude measures o f genetic distances), and political
and econom ic constraints on w hich areas may be
preserved. A ny programme o f assessment and quanti­
fication o f biological diversity needs to go beyond mere
species counting, and m ove towards developing a
'calculus o f diversity’ along the lines ju st sketched.
5. T H E W O R K F O R C E A N D T H E D A T A B A SE
N o survey o f conceptual aspects o f the assessment of
biological diversity is com plete w ithout consideration
o f how the effort is being deployed, and how the
em erging inform ation will be organized. These
questions arc, o f course, addressed clscwlicre, but a
few o f the conceptual issues deserve emphasis.
Sysuttiatic information about how the taxonomic
workforce is deployed among the various taxonomic
groups is hard to get. This fact is itself revealing, and
unfortunate. One survey, based on information from
Australia, the U .S.A . and the U .K . (Gaston & M ay
1992), can be broadly summarized as saying that the
taxonomic workforce in each o f these three countries is
roughly evenly divided among vertebrates, inverte­
brates, and vascular plants; microorganisms typically
account for less than 5%. Taking a very conservative
estimate o f 3 million invertebrate species as the global
total, this means the ratio o f taxonomists to species is
an ortlcr-of-magTiiiudc greater for vertebrates than for
plants, and two ordcrs-of-magnitudc greater for
vertebrates than for invertebrates. These disparities
are niirrorcd in publications per spccics (M ay 1988).
'I'liis is no way to run a business.
Gastnn & M ay (1992) also make the indiiect
estimate that only about 6% o f practising taxonumisis
(professionals and serious atnateurs) are based in
dcvci-.ping countries in Africa, Asia and Latin ,
America. This 6% figure is similar to the corrcspontling estimates for other scientific subjects. Such a
similarity is, of course, to be expected, but the figure
has a clillcrcnt significance than it has, for c.'tample,
for numbers of m athematicians .or cficmists; the
greatest part of the planet’s icrrcstriaf diversityboth recorded and unrecorded - is in just those
tropical countries where only such a small fraction
of the taxonomic workforce is based
This mismatch between the geographical location
of the workforce and its workload gives special point
lo how wc organize the information we have.
First, wc simply need tn be m oving faster to
coordinate the information that already exists, on
file cards and computers, scattered around the world's
major and minor museums and other collections. This
requires m oney, but on nothing like the scale wc
currently fund library catalogues or astronomical
cnlcrpri.scs (the taxonomy and systematics o f stars,
in cllt'ft;; many o f the planet’s species look (o have a
shelf life shorter than our richly and carefully
prcsci\ed books, much less the average star. Con- '
ccplual questions arise in the design o f such
coordinated databases. They need, where possible,
to go beyond basic taxonomic information, codifying
information about species distributions, vegetation
types, climate, and the physiographic variables which
influence where a species may live. A leading exam ple
o f such a database is Australia’s Environm ental
Resources Information Network (ERiw), T h e result is
that i.RiN can predict, for exam ple, where new
populations o f an endangered spccics with a limited
known range might be expected to be found, or what
rcgion.s arc likely to become trouble spots o f
endangered species in the near future, erin has also
been a pioneer in dealing with vexed questions of
ownership o f data, and who should pay how much to
acqtiirr it, and under what circumstances. I do realize
the dilficullies here; Stork & Hine (1994), for instance,
estimate that 40% o f the roughly 400000 recorded
spccics of beetles are known from only one site. But wc
must do the best wc can, using informed guesses (and
Quantifying biodiversity
R
.
M
.
M
a
y
1 9
caJibraUng inform alion witJi indices to indicate its
earth, and even o f why it is that num ber, rather than
reliability; sec H am m ond, this volum e).
m any m ore or less. At current rates o f advance, it is
Second, these databases must be widely available
even conceivable that species identifications and
and ‘custom er rricndly’. W c need to accelerate current
subsequent taxonom ic assignm ents will be based
eflbrts for international cooperation and coordination,
primarily on autom ated analyses o f appropriately
so that com /non Ibrmats are increasingly agreed and
chosen D N A or other m olecular m aterial, keyed out
used.
against synoptic m olecular ciadogram s. But the
Third, wc should be rorward-looking in the
addition o f new species, and the m ovem ent toward a
com pilation and use of these databases. Using
com prehensive account o f the treasurehousc o f
CD-ROM, w e can store images o f type-specimens; ihrccbiological diversity that billions of years o f evolution
dimensionaJ hologram images should be the norm of
have bequeathed us, will, I believe, necessarily
the future. H ere is one way partly to rem edy the
accum ulate more slowly.
m ism atch between where the inlorm ation i s - i n the
collections o f the major muscum.s o f natural history in
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quantitative boitom samples. Am. Nat. 139, 313-341.
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H ow will the enterprise o f (piantifying biologic.tJ
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Hammond, P.M. 1994 Described and estimated species
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D. L. Hawksworth & R. R. Colwell), pp. 11-25.
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CAB International.
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o f individual species, even if this is very often a guess
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(and identified as such, with som e indication o f the
Hawksworth, D.L, 1993 The tropical fungal biota: census,
precision). So m any o f the conceptual questions which
pertinence, prophylaxis, and prognosis. In Aspects of
I have raised in earlier sections can only be answered
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if wc indeed hdVe such a sy noptic and coherent
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A.T. 1994 Hedge planting; the implications of using
assessment o f the true m agnitude and distribution of
alien
rather than native genotypes.
biological diversity hinges on fundam ental research,
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tion wc already have; but that codifying effort is
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unlikely to happen unless wc put more intclicctuai
the fossil record. Science, Wash. 261, 310-315,
and financial resources into basic taxonom ic research.
Lande, R. 1988 Genetics and demography in biological
So, in 50 years t expect us to have a fairly good idea
conservation. Science, bVasA. 241, 1455-1460,
o f roughly how many species there currently arc on
May, R.M. 1978 The dynamics and diversity of insect
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R. M. M ay
Quantifying biodivtrsity
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The R oot Causes
of Biodiversity Loss
E d ite d b y
A le x a n d e r W o o d ,
P a m e la S t e d m a n - E d w a r d s
and Jo hanna M a n g
W W F
EIAIRITIHISIGIAIN
\
m
m
\
L a r t h s c a n P u b l i c a t i o n s L td , L o n d o n a n d S te r lin g , V A
First published in the UK in 2000 by
Eartliscaii Publications Ltd
Copyright © 2Q00 Macroeconomics for Suscainahlc Development Program Office,
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Chapter 2
A F ram ew o rk fo r A nalysing
Biodiversity Loss
P a m e la S ie d m a n - E d w a r d s
T he fram ew ork for analysing so cioeco n o m ic root causes o f biodiversity loss is
d esig n e d as an interdisciplin ary a p p ro ach , w h ic h a llo w s for a n a ly sis th at
integrates the varied w o r k o f social sciences. It em p h a sizes the links across
scales from local to international to create a conceptual m odel - a descriptive
picture using qualitative and quantitative data - o f the causes o f biodiversity
loss for a particular site.
T he rapid loss o f biodiversity and habitats around the w orld is occurring
at a local level as a result, for example, o f farmers clearing n ew fields, timber
c o m p a n ie s o p e n in g new forests for log g in g and hunters p r o d u cin g for city
markets. T he explanation for these activities, however, is often fou nd in s o c io ­
e c o n o m ic forces that arise not at the local level but far fr o m the sites o f
b io d iv e rsity loss. As d iscu ssed in C hapter 1, c o n s e r v a tio n w o r k has rarely
understood the importance o f these socio econ om ic factors, w ith the result that
b io d iversity loss c o n tin u e s to accelerate despite years o f e ffo r ts to p ro tect
h a b itats and species.
12
The Root Causes o f BioJii'ersily Loss
To provide the basis for more effective action for conservation, the frame­
work or Analytical Approach presented here seeks to connect w ell-know n lt>cal
drivers o f biodiversity loss to the broader range of socioeconom ic factors, or
root causes, that shape the decisions made at the local level. The framework for
analysing socioeconom ic root causes o f biodiversity loss is designed as an inter­
disciplinary approach, which alk>ws for analysis that integrates the varied work
o f social sciences. It emphasizes the links across scales from local to interna­
tional to create a conceptual model - a descriptive picture using qualitative and
quantitative data - o f the causes o f biodiversity loss for a particular site.
T his chapter briefly explains the need for this type o f fram ew ork and
discusses the types o f socioeconom ic factors that must be considered in studies
o f root causes. It then outlines tiie approach for case studies developed for the
R o o t C auses project and reviews an e x a m p le o f the a p p lic a tio n o f the
approach. Finally, this chapter discusses som e o f the methodological and datarelated issues encountered in the process o f carrying out the ten case studies,
and considers h o w these studies can lead to recom m endations for conserva­
tion actions.
T
he
N
eed fo r a
C o m p r e h e n s iv e A p p r o a c h
Habitat loss and degradation arc tlic primary proximate causes o f biodiversity
loss world-wide.* To understand why extensive alteration and destruction o f
habitats is occurring, it is essential to understand wbat lies behind these proxi­
m ate causes. S o c io e c o n o m ic forces and circum stances create incentives for
activities that put pressure on biodiversity and create disiiicentivc.s for more
sustainable behaviour. S o cio eco n o m ic institution s, including, inter alia,
markets, laws, political bodies and social norms, frequently favour expansion
o f patterns o f development that lead to biodiversity loss. Yet, the connections
betw een social and eco n om ic structures, on the one hand, and biodiversity
loss, on the other, are not well understood.
M o s t analyses o f the econ om ic, social, political and cultural causes o f
biodiversity loss have focused on proximate and root causes at the local level.
This focus on the com m unity and micro-regional level has led to an emphasis
o n conservation solution s at the same level, as discussed in Chapter 1. The
continuing loss o f biodiversity, however, points to the need to take a broader
loo k at factors beyond the local level tJiat are driving environmenral change.
O nly by exploring and understanding the so cio e c o n o m ic factors at various
levels - local, regional, national niitl intcriiationai - that drive people to
degrade the natural environment will we be able to change this behaviour. To
find more effective conservation solutions, we must step back and look at the
com plex set of influences on local resource use that constitute the root causes
o f biodiversity loss.
While individual socioeconomic factors affecting the environment, such as
population growth and economic policies, have received substantial attention,
a review o f the existing literature turned up few exam ples o f analyses that
w ent beyond a single socioeconom ic factor and virtually none that cut across
A V u D in ’ii’o r k f o r A n a ly s in g llio d iu c r s it y L o s s
13
a ll t y p e s o f f a c t o r s . T h e so cio eco n o m ic ro o t cau ses o f b io d iv e rsity lo ss are
frequently m entioned, but there has been little em p irical analysis o f p a rticu la r
cau ses o r cases o f b io d iv e rsity loss. L is t s of cau ses o f b io d iv e rsity loss all
suggest the s a m e g ro u p of so cio cco m jm ic factors^ but do not provid e the in­
depth, m ulti-level a n a ly sis needed to sh o w h o w these factors cause biodiversity
lo ss. M e th o d o lo g ie s fo r the stu d y o f e n v iro n m e n ta l p ro b le m s, w h ic h m ust
in teg rate k n o w le d g e and m ethods fro m a v a rie ty o f so c ia l and b io lo g ica l
sciences, are in the early stages of development,-^ H ow ever, a w ide literature on
the roles o f hum an m igration, population g ro w th , econom ic policies and stru c­
tu re s, p o verty, c u ltu ra l and so cial stru c tu re s, an d d evelo p m en t p a ttern s in
determ in in g resource explo itation - alth ou g h g en erally an alysin g o n ly a few
factors at a tim e - provid es a strong basis fo r exam in in g the question o f b io d i­
versity loss.
T h is exten sive literature'* on the re la tio n sh ip between sp ecific so c io e c o ­
n o m ic fa cto rs an d the en viro n m en t p ro v id e s im p o rta n t b a c k g ro u n d for
stu d yin g the ro o t cau se s o f biod iversity loss and w a s d ra w n on e x te n siv ely
both in the d evelopm ent o f this analytic fra m e w o rk and by the case studies.
M o st an alysis has focused on the fo llow ing areas:
•
•
•
•
•
d e m o g r a p h ic change;
poverty and ineq u ality;
public policies, m arkets, and politics;
m acro eco n o m ic po licies and structures; and
social change and developm ent.
T h is literatu re p ro v id es im portant know ledge and m ethodologies for u n d e r­
standing the relatio n sh ip between these factors and environm ental degradation
and points to the key factors that must be considered in these studies. W h ile
there is extensive o v e rla p among the five categ o ries m entio ned , they reflect
co m m o n d iv isio n s and distin ctions in the literatu re. W ith in each categ o ry a
v arie ty o f th e o rie s, arg u m en ts, and stu ilic s from v a rio u s d isc ijd in c s o ffer
d iverse e x p la n a tio n s fo r en viro n m en tal d e g ra d a tio n , m an y o f w h ic h are
relevant to biodiversity loss. These categories arc described in greater detail in
B o x 2 .1 . W h a t is im p o rtan t to remember is rhat these five categories provid e a
b asic stru ctu re fo r ca teg o rizin g root c a u se s. W h e th e r they are in c lu s iv e o r
exclusive and h o w they overlap is less im p o rtan t than the fact that they a llo w
us to conceptualize, and so categorize root causes and therefore ensure that all
possible root causes are incorporated into the an a ly tic fram ew o rk. A d d ressing
biodiversity loss requires an understanding of ho w all these factors are linked
together and h o w they operate at different scales to drive biodiversity loss. A ll
o f the issues raised by this literature must be considered w ithin a single an alytic
fram ew o rk for root causes rather than as distin ct categories.
A fram e w o rk for integrating our understanding o f the role of this broad
range of so cio eco n o m ic factors that are at w o rk at any one place and tim e w as
cle arly needed. In ord er to carry out the case studies it w as essential to create
an A n a lytica l A p p ro a ch that would a llo w the researchers to take a tru ly in ter­
d iscip lin ary approach to the com plex causes o f biodiversity loss. T h e ap p roach
14
Tf?c R o o t Causes o f Biodiversity Loss
Socioeconomic root causes
Proximate causes
irS S s ii
Figure 2.1 B io d iv e r s it y L o s s : P r o x im a t e a n d S o c io e c o n o m ic R o o t C a u s e s
th a t w a s u se d , w h ic h is d escrib ed later in th is chapter, w a s d e s ig n e d to be
flexib le e n o u g h to be applicable to a w id e range o f situations and in corporate
all types o f s o c io e c o n o m ic factors, w h ile p r o v id in g a c o m m o n fr a m e w o rk that
w o u ld ensure com p a rab ility o f findings and c o n c lu sio n s across the ca se studies.
C
o n ceptu a l
B a ses
of th e
A
n a l y t ic a l
A
pproach
T h e A n a lytica l A p p ro a ch is designed to prov id e a fram ew ork to bring to geth er
under o n e um brella the w ork o f a variety o f social science disciplines th at have
s o u g h t to u n d ersta n d the causes o f biodiversity loss - from a n tiir o p o lo g y to
e c o n o m ic s to p o litica l science.^ T his fr a m e w o rk is intended to a llo w a clear
vision o f h o w ail the various parts o f the puzzle - from local p o p u la tio n g r o w th
to n a tion al p o litics to international markets - together drive biodiversity loss
a t a p a r tic u la r site. It w a s d e v e lo p e d based on w o r k that has been d o n e in
p o litic a l e c o n o m y , political e c o lo g y and t|u a lita tiv c m o d e llin g o f c o m p le x
s y s te m s . T h e a p p r o a c h draw s from p o litic a l e c o n o m y and p o litic a l e c o lo g y
w o r k to d e v e lo p the types o f q u estio n s that m u st be asked and the typ es o f
lin k a g e s th a t m u s t be e x p lo r e d to u n d ersta n d the s o c io e c o n o m ic c a u s e s o f
biodiversity loss. From w o rk on m o d ellin g it draw s the tool o f the co n c ep tu a l
16
The Root Causes o f BioiUi>ersity Loss
of poverty, resource degradation and furlher impoverishment. Wealth has also
been closely linked with environmenlal degradation through high levels of
consumption and short-term managernenl ol environmental resources.
Land degradation - both a result and a cause of rural poverty - has direct
and indirect impacts on biodiversity as it forces changes in produclion patterns,
migration and frontier expansion. Many authors find that the poor are dispropor­
tionately located in marginal lands and fragile ecosystems. Moreover the poor
are thought to make particularly damaging use of the environment when tradi­
tional systems of resource managernenl break down as a result of
socioeconom ic change. Insecurity of tenure rights and the prevalence of
landlessness, lack of financial and human resources and poor access to govern­
m ent resources and infrastructure all prom ote short-term m anagem ent
strategies and unsustainable use of natural resources among the poor.
Wealthy resource users, such as large-scale farmers and other commercial
producers, also take short-term economic and environmental views. Because
they can appropriate large shares of the resource base, they use resources
extensively rather than making investments in resource management. Inequality
among nations has also received substantial atlenlion. Poor countries are trans­
form ing and exporting Ihetr natural resources to rich countries. This pattern is
linked wilh inequality wilhin developing countries: the poor are exploiting the
environment to provide exports that primarily benefit Ihe rich.
In Tanzania's river deltas, degradation of the m angrove forests is largely
driven by poverty. Agriculture, fishing and harvesling of mangrove poles, bark
and logs are Ihe main econom ic activities, al) of which affect the mangrove
ecosystem and consequently biodiversily. Fishing provides an annual income of
US$300 or less per fisherman. Agriculture provides little more. Access to nearby
towns is difficult and social services are Irmiled. Given the lack of other sources
of support, land is cleared for subsistence farming. Mangroves are cut both for
subsistence use, including use for fuelwood, housing, boat m aking and fish
traps, and for commercial sale, providing one of the few local sources of cash
income. Mangrove habitat is being destroyed without providing any long-term
relief from poverty.
Public Policies, Markets, and Politics
National Jaws, economic and political institulions and government policies are
central to many recent explanations of biodiversity loss.® Most attention has
focused on ways to eliminate or compensate lor 'failures' in laws, policies and
organizations without an examination of the underlying socioeconom ic forces
that produce the governance and market structures that promote biodiversity
loss. Two types of policy failures are pointed out. The first are perverse govern­
ment policies that provide incentives for environmental degradation. The second
are government policies and market institulions that fail to incorporate environ­
mental values, including the value of biodiversity, into decision-making.
Policy and market 'failures' are rarely accidental. Policies, laws and formal
and informal institutions are products of political, social and economic forces.
They are established and maintained because they benefit, or are intended to
benefit, some sector or class of the economy or society. Environmentally
perverse policies often serve traditional development goals, such as industrial­
ization, export expansion, increased food produclion and poverty relief. In many
cases natural resources provide a cheap way to support economic growth. To
A t-iiinii'irork fo r A n a ly sin g Itiii
understand biodiversity loss, a complete model must look not only al the results
of policies and market siruclures. but also at the reasons why those policies and
market structures persist.
The Vietnam case illustrates some of the environmental problems that arise
from government policies. The Vietnamese government has supported coloniza­
tion in and around protected areas. Increasing populations have led to
shortened fallow periods for shifting agriculture as well as increased hunting
and use of tim ber and other lorest products. G overnm ent efforts to resolve
persistent food shortages included collectivization of agriculture from the 1950s
to the 1970s, which actually aggravated the problem by reducing production
incentives and land colonization programmes. Once the failure of the collec­
tivization m ovement was recognized. It was replaced by a contract-output
system, which increased producer incentives, but rice markets remained in the
hands of the government and production fell once again. Yet while productivity
fell, use of land for agriculture continued to expand under all these programmes,
increasing habitat destruction and biodiversity loss.
M acroeconom ic Policies and Structures
Biodiversity is affected by the structure and behaviour of international and
national markets and related government policies that shape focal resource-use
decisions.® The role of national and international markets in shaping production
patterns and resource-use patterns is enorm ous. G overnm ents have often
sought lo mitigate some of the effects of relations with international markets and
to prom ote developm ent through m acroeconom ic policies that alter prices,
including controls on trade, capital flows, exchange rates and national markets.
However, the current shift toward market liberalization, often manifested through
structural adjustment program m es in developing countries, has increased the
role of international markets, leading to large-scale changes in production and
resource-use patterns.
Adjustm ent has been essential to regaining m acroeconom ic stability and
prom oting econom ic growth in many countries. However, dem and for foreign
exchaiige needed lo support imports and debt repayments and the Jack of other
market opportunities provide impetus to developing countries to mine their
natural resources for exports. International trade agreem ents, such as the
General Agreem ent on Tarifis and Trade (GATT) and the new W orld Trade
Organization (WTO), have little to say about environmental problems created by
trading patterns; nor have public or private financial institutions evinced much
concern for the environmental impact of financial and investment flows.
Two broad theoretical camps that present very different models of the role
of m acroeconom ic factors in driving resource-use patterns have emerged.
Traditional neoclassical economic theory posits that improvements in a govern­
ment's m acroeconom ic policy, such as trade liberalization and exchange-rale
deregulation, will improve resource-use patterns. Political economy theory posits
that changes in macroeconomic policy, without changes in the underlying power
and market structures, may worsen resource-use patterns. Empirical w orks
seem to show that both have some Irutii.
The case of Pakistan illustrates the wide-ranging impacts of m acroeconomic
policies. The mangrove forests of the Indus Delta have been affected in various
ways by the country's efforts lo improve its balance of payments, The greatest
threat lo the mangroves is the reduction in fresh water flows lo the della, a reduc-
18
The R o o t Causes o f UioJii'Ctshy Lttss
tion caused by dams designed to provide irrigation water for agriculture. The
government subsidizes agriculture with cheap irrigation water in part to provide
support to industry, which produces most of the country's exports, The expan­
sion of industry in the Karachi area, a result of a deliberate policy to increase
exports to improve the balance of payments, has led to heavy pollution of Ihe
mangrove forests directly as well as indirectly, since the centralized industrial­
ization has promoted rapid urban growth. Finally, export policies have promoted
over-fishing in the region. Devaluation of the rupee greatly increased the price of
fish, leading to an influx of m igrants to the region and a rapid expansion of
fishing. The political power of agricultural landlords and of industry has
maintained policies of cheap water and support for exports in place, despite the
environmental degradation caused by these policies.
Social Change and Development Biases
Development is widely considered synonymous with increases in consumption
and the transformation of natural resources.’ '’ This understanding of develop­
ment is deeply entrenched in many economic and political systems. In addition
a social or cultural preference for this type of developm ent has become
widespread. Both direct and indirect linkages are apparent between a people’s
culture and its resource-use patterns. Culture has a direct bearing on popula­
tion, econom ic activities, settlem ent patterns, political structures and other
factors affecting biodiversity.
Despite great differences among Ihe societies of the developed world, broad
similarities appear in their approaches to resource exploitation and consum p­
tion. The expansion of Western culture has induced social change around the
world. The bias of many developing country governments in favour of urban
over rural areas and in favour of industry over agriculture reflects this under­
standing of developm ent. In this process, traditional cultures that are less
destructive of environmental resources are being lost. The modernization of
traditional societies not only introduces these peoples to markets and rising
consumption levels, it also leads to loss of traditional knowledge about sustain­
ability and to the disruption and loss of traditional institutions for managing
resources.
The role of social structures and culture in shaping environmental outcomes
is illustrated by the Brazil case. Similar policies, designed to promote commer­
cial agriculture and reflecting a belief in this 'modern' style of development as
well as In the need to occupy 'vacant* lands, were applied throughout the
Cerrado region. The impact of the promotion of tlris development model varied
with the social context. In one area - Rio Verde - where the topography was
conducive to mechanized agriculture, the commercial monoculture model was
widely adopted. In a second area - Silvania - where agricultural conditions also
appeared favourable, the model was not widely adopted because social condi­
tions - including a long history of settlement in Ihe area and a well-established
community - favoured the maintenance of the diversified family-run farm over
the new model. In yet a third area - Alto Parafso - the rugged terrain meant that
large-scale agriculture was loss viable. Added to this is the fact that new settlers
in Ihe area were attracted by the area’s natural beauty and are investing in
ecotourism and similar enterprises, thus reducing the likelihood that the
commercial model will be accepted there.
m o d e l , w h i c h p r o v i d e s th e m e n u s o f e f fe c tiv e ly d e s c r ib i n g o r i llu s t r a t in g th e
f a c t o r s a f f e c t i n g b i o d i v e r s i t y lo s s at a p a r tic u la r s ite . T h e hcn cfit.s o f t h e s e
m e t h o d s arc e x p la in e d as th e a p p r o a c h is d e scr ib ed m o r e fu lly b elo w .
T h e f r a m e w o r k r e co n im ciK ie ii here is fii.st a n d forcino.st a n in t e r d i s c i p li ­
n a r y a p p r o a c h fo r c o n d u c t i n g c a s e s t u d i c .s . ' ’ Jt is d e s i g n e d t o r e v e a l
s o c i o e c o n o m i c f a c t o r s w o r k i n g a c r o s s s c a l e s fr o m l o c a l t o g l o b a l a n d th e
m e c h a n i s m s or p r o c e s s e s l i n k i n g s o c i o e c o n o m i c fa c to r s t o r e s o u r c e u s e a n d
th e n c e b io d iv e r s ity lo ss. It is a l s o dc.sigiicd to be fu n c tio n a l w i t h i n sev e r e d a ta
J im ita tio n s fo r b o th b io l o g i c a l a n d s o c i o e c o n o m i c in d ic a t o r s . T h e c a s e s t u d y is
s e e n as th e m o s t u sefu l to o l for u n d e r s ta n d in g b io d iv e r sity lo s s , g iv e n th e g r e a t
v a r i a t i o n s in th e e c o l o g i c a l a n d s o c i o e c o n o m i c c o n d i t i o n s s h a p i n g r e s o u r c e
u s e a n d b io d i v e r s it y lo s s at d if f e r e n t s i t e s . C a s e s t u d ie s o f a r e a s c r it ic a l for
b io d i v e r s it y con .sc rv a tio n s e r v e t w o p u r p o se s: t/icy p r o v i d e th e b a s is fo r d e v e l ­
o p i n g e f f e c t i v e p o l i c y c h a n g e s , fo r p r o t e c t i n g a p a r t i c u l a r s it e a n d for
d e v e l o p i n g c o m p a r i s o n s a c r o s s rcgion.s an d c o u n tr ie s th a t d e e p e n o u r k n o w l ­
e d g e o f s o c i o e c o n o m i c r o o t c a u s e s . (T h e m a in fin d in g s o f th e c a s e s tu d ie s are
p r e s e n t e d in C h a p t e r 3 . S u m m a r i e s o f th e i n d i v i d u a l c a s e s t u d i e s f o l l o w in
C h ap ters 6 - 1 5 .)
In recen t years, a fe w researchers liavc a tte m p te d to a n a ly se th e full c o m p l e x ­
ity o f e n v i r o n m e n t a l d e g r a d a t i o n t h r o u g h c a s e s t u d i e s , ’^ T h e i r a n a ly t i c
a p p r o a c h , o fte n d escr ib ed as p o litical e c o lo g y , has served a s th e b a sis for s o m e
o f t h e s t r o n g e s t lite r a tu r e o n s o c i o c c o n o m i c - c n v i r o n m e n t r e la t i o n s h i p s .
A l t h o u g h th ere are i m p o r t a n t v a r i a t i o n s a m o n g th e se c a s e s t u d i e s , t h e y are
c h a r a c te r iz e d by a n a t t e m p t to d e fin e th e in t e r n a tio n a l, n a t i o n a l a n d r e g io n a l
s o c i o e c o n o m i c c o n d it io n s th a t s h a p e local rcsourcc-u.sc p a tte rn s, a n d t o e x a m in e
th e v a r y in g resp o n ses o f local r c s o u ic c -iis c r s to their c o n t e x t . P o litic a l e c o lo g y ,
lik e p o litic a l e c o n o m y , is r o o te d in t w o fu n d a m en ta l i d e a s . F i r s t , p o litic a l and
e c o n o m i c factors nrc in e x tric a b ly linked. S e c o n d , political a n d e c o n o m i c p o w e r
is cen tral in d e te r m in in g r e s o u r ce-u se p attern s in c lu d in g e n v ir o n m e n t a l d e g r a d a ­
tio n . T h is a p p r o a c h , w ith th e a d d itio n o f so cial and cultural fa c to r s , fo r m s the
b asis o f th e m e t h o d o l o g i c a l d is c u s s io n d e v e lo p e d here.
P o litic a l e c o l o g y o f t e n u s e s c h a i n s o f e x p l a n a t i o n in o r d e r t o a d d r e s s the
q u e s t i o n s o f sca le an d lin k a g e s (B laikic .and B r o o k fie ld , 1 9 8 7 ) . S tu d ie s sta r t by
l o o k i n g at th e lo c a l level a n d th en m o v e up the cliain o f e x p l a n a t i o n t h r o u g h
i n t e r r e la t io n s h ip s o f lo c a l r e s o u r c e users w ith r e g io n a l, n a t i o n a l a n d i n t e r n a ­
t i o n a l a c t o r s . C h a i n s o f c x p l a n n r i o n p r o v i J c a t o o l fo r u n d e r s t a n d i n g l o c a l
r e s p o n s e s t o fa c to r s o p e r a t i n g at a sc a le b e y o n d the lo c a l le v e l. B i o d i v e r s it y
lo s s o c c u r s at the lo ca l level a.s the result o f m a n y in d iv id u a l d e c i s i o n s a b o u t
r e s o u r c e u.sc. The lo cal a c t o r w h o c o i i l r i h m e s lo b io d iv e r s ity loss - s u b s is te n c e
fa r m e r o r fis/ie r m a n , c o m m e r c i a l p ro d u c er, g o v e r n m e n t a g e n t - is a c t in g w ith in
a p a rticu la r set o f s o c ia l, c u ltu ra l, p o litic a l, e c o n o m ic a n d e n v ir o n m e n ta l
c o n s t r a i n t s (P errin g s et al, 1 9 9 5 ) . To u n d e r s t a n d b i o d i v e r s i t y l o s s , w e m u s t
u n d e r s t a n d t h o s e lim it s a n d p o s s i b i l i t i e s a n d h o w th e y a f f e c t r e s o u r c e u se .
T h i s d o e s n o t m e a n th a t b io d iv e r s ity lo s s is p r e d e t e r m in e d b y c i r c u m s t a n c e s .
R e s o u r c e users m a k e d e c is io n s n o t o n ly w ith in their p a r tic u la r c i r c u m s t a n c e s
b u t a l s o a f f e c t i n g th eir c ir c u m s t a n c e s . G l o b a l an d r e g io n a l s y s t e m s g e n e r a te
20
The R o o t Causes o f Biodiversity Loss
Temporal
Geographical
Political
Economic
Today
Farm
Agreernenls among
nciglrhours
Subsislence
Agricultural cycle
Wildlife reserve
Local council
Local markol
PoNiical term
Eco fcgion
Slntc governiitcnl
Stale developmeni lunds
Timbef cycle
Nalion
Nolional govemmenl
Nalional policies
Generation
Conlinenl
Inlernalional
inlervenlions
Inlernalional markets
F ig u re
2 .2 E x a m p le s o f Scale
both opportunities niul constraints for local .socioeconom ic sysrein.s (GaKopin,
1991) aiiiJ local coiulition.s in torn will affect regional and giol)al factors. 'Flic
chain of explanation can be follow ed in botJt directions,
' Selecting the appropriate scale or scales for analysis is crucial to determ in­
ing the results o f the case study (Sanderson, 1994; see also G allopin , 1 9 9 1 ,
and Garcia, 1 9 8 4 ). D ifferetices in socioecon om ic factors across scales im ply
both differences in the size or generality o f ihcir im pact and differences in
distance from their effect. For exam ple, at the local level, coninninity demand
for firew ood m ight be driving deforestation. At the nation al level, national
forest policies a llo w in g unrestricted lugging m ight have m ore w idespread
im pacts on forest use. A t the international level, foreign dem and for tim ber
m ight be shaping forest policies in many coimtric.s. D ifferences in geographic,
so cio eco n o m ic and tem poral scales must all he taken into account. Jhditical
scales, for exam p le, could run from the village council to provincial govern­
m ent alliances and to national gt)vcrmneiir agencies. G eographic .scale.s coLild
run from the lucal park to the ecosystem and tt) the nation. Temporal scales
could run from a snnpsliot o f the situation to a year’s agricultural cycle, to a
generation or longer.
.
Particular variables play a larger or sinallcr role, depending on spatial or
tem poral scales, geograpliic location and olhei factors (Machli.s and laue.ster,
1 996; Roijiic, 1997; Stern et al, 1992). An analysis o f biodiversity loss that
considers only local factors will find a different range o f c a u . s a l factors than an
an alysis that lo o k s on ly at global factors. 'Fluis the A n alytical A pproach
em p hasizes tak in g all scales into con sid eration . L ikew ise, an analysis that
lo o k s only at the con tem p orary situ ation may ignore im p ortan t historical
variables that have shaped current resource use. D efin in g the appropriate
tem poral scale, given the p ossib ility o f long gaps betw een cause and effect,
m ay be one o f the greatest obstacles to undcrsranding biodiversity loss. For
ex a m p le, h istorical patterns such as e x p lo ita tio n o f natural resources by a
co lo n iz in g cou n try m ay co n tin u e to shape resource use through su rviving
patterns o f land tenure, or historical use may have degraded resources to the
p o in t w h ere new m eans o f subsistence have been developed that bear little
resem blance to histo rical patterns. D efining the approp riate geographic scale
can also be d ifficult. Fo r exam ple, population grow th is highly correlated w ith
d e fo re sta tio n at a g lob al level, but the co rre la tio n often d ecreases w h en
m easured at sm aller gcograpiiic scales. In other w o rd s, population g row th and
deforestation are often occurring at different locations and so are not directly
Jinked f M c y c r and Turner, 1992J. T h e re m ay, how ever, be stro n g in d ire ct
lin k a g e s betw een p o p u la tio n g ro w th and d e fo re sta tio n , as g ro w in g u rb an
p o p u la tio n s d cjiia n d m ore a g ricu ltu ra l p ro d u cts from ru ra l a rea s. T h e best
a n a ly s is w ill c o n sid e r factors a c ro ss a range o f sca le s, w eig h th e ir re la tiv e
im pact and exam ine the linkages across scales.
T h e lin k a g e s am ong the g lo b a l, reg io n a l, a n d lo cal s o c io e c o n o m ic and
ecological system s arc m ultidirectional. C han g es in local system s contribute to
p o litic a l, so cia l, cu ltu ral or econom ic change at various levels, ju st as changes
at reg io n al, n a tio n a l and global scales affect local system s. In su ch co m p le x
system s relatio n sh ip s a rc co n tin u ally evolving (G a llo p in , 19 91 ). A n d as inter­
n a tio n a l so c io e c o n o m ic system s exp an d their re a ch , lo ca l sy stem s are
in c re a sin g ly in flu e n ce d by d ista n t p ro cesses (G a llo p in , 1 9 9 1 ). H o w e v e r,
processes at a larger scale arc not necessarily m ore im p o rtant determ inants o f
lo cal resource use than processes at a local scale. F o r exam ple, lo cal m arkets
m a y he m o re clo se ly lin k ed a n d , therefore, m o re im p o rta n t in d e te rm in in g
hunting patterns than national or ijitcrn atio n al m arkets. A n a ly sis at the local
level w ill reveal the variety o f factors affecting biodiversity, w h ereas stric tly
global an alysis m ay conceal this variety. H ow ever, global trends m ay exp lain
the sim ilarity in w o rld w id e patterns of biodiversity loss, if not the co m p lexity
o f the linkages through w hich riicy w ork at tlie local level (Sanderson, 19 94 ).
C o n c ep tu a l tnodals, s o m e tim e s c alled c a u s a l m a p s o r in fo r m a l m o d e ls ,
a llo w us to describe various scales and linkages a m o n g factors in o n e picture.
A c o n c e p tu a l m od el ‘is an idea o f h o w ihe c o m p o n e n ts o f a sy stem fit to g e th e r ’
(M a c h lis a n d J-orestcr, 1 9 9 6 ). C o n c e p tu a l m o d e ls p r o v id e a descriptive pictu re,
either th rou g h w o r d s or diagram s, o f the ch a in o f e x p la n a tio n . T h e y are fle x i­
ble, q u a lita tiv e a n d c lo se ly lin k ed to the k in d s o f data a v a i l a b l e . T h e y are
n o t in ten d ed to be predictive or highly qu antitative.
T h e se m o d els p ro vid e a flexib le fra m e w o rk that can a cco m m o d a te and
integrate a broad range of quantitative data and qualitative in fo rm ation about
b io d iv e rsity Joss. H u m a n causes of e n v iro n m e n ta l change can be d iv id e d
roughly into tw o broad categories: physical factors and so cio eco n o m ic factors
{R o b in so n , 19 91 ). P hysical factors, such as po pu lation g ro w th , co n su m p tio n
and extraction o f resources, can be m easured n o t o n ly p h y sica lly but q u a n tita ­
tiv e ly
as
w e ll.
Q u a n tita tiv e
d e scrip tio n
of
these
fa cto rs
c o n trib u te s
su b stan tially to o u r understanding of biodiversity loss. Socioeco n om ic factors
such as p o litical power, m arkets, organizations and attitudes are the factors by
and tJirougli w Jiich d e cisio n s ab o u t p h y sic a l reso u rce use are m ade. T h e se
fa cto rs are in h e re n tly u n q u a n tifia b le , but they are esse n tia l to d e scrib in g
hum an behaviour.
-
22
T h e R o o t Causes o f B iodiversity Loss
T h e scientific c o m m u n ity is calling for predictive, testable m o d e ls o f the
rela tio n sh ip betw een r o o t causes and hiodivcrsiry lossd^ H o w ev er, the nature
o f the data needed and o f social science m e th o d o lo g ie s suggests th at the d e v e l­
o p m e n t o f such m o d e ls w ill be e x c e e d in g ly d iffic u lt, if n o t im p o s s ib le , fo r
m o s t c a se s. E xistin g q u a n tita tiv e a p p ro a c h e s to u n d e rsta n d in g r e so u r c e use
a n d biodiversity loss are in ad eq u a te to analyse the broad range o f m icro - and
m a c r o -lc v c l fa c to r s a ff e c tin g lo c a l d e c isio n s. T h e se a p p r o a c h e s n e c e s s a r ily
fo c u s o n only o n e or tw o pieces o f the much larger puzzle, ignorin g both crossscalc and interdisciplinary issues in favour o f precise analysis o f a sin g le factor,
o ften at the m icro-level, because o f the dearth o f other appropriate data.
C o n c e p t u a l m o d e ls c a n d e scr ib e the c o m p le x it ie s o f s o c i o e c o n o m i c
relation sh ip s that analysis o f strictly quantifiable relations c a n n o t be e x p e cted
to reveal (Stern et al, 1 9 9 2 ) . T h e se rela tion sh ip s can best be d escr ib e d w ith
w o r d s or diagram s rather th an q u a n tita tiv e m easu res. For e x a m p le , m a t h e ­
m a t ic a l m o d e ls h a v e been d e v e lo p e d th a t relate d e fo r e s ta t io n to m ig r a tio n
in d u ced by road building. W h ile it is im portant to recognize and c o n fir m the
im p a c t o f road building, s o lu tio n s can only be found if w e e x a m in e the reasons
fo r r o a d b u ild in g a n d th e r e a s o n s w h y p e o p le are m ig r a tin g . Q u a lit a t iv e ,
in tu itive thinking is the o n ly m eth o d o lo g ic a l ap p roa ch that can in c o r p o r a te all
o f the relevant s o c io e c o n o m ic factors. Therefore, case studies can be the m o st
im p o r ta n t too l for e x p la in in g the r o o t causes o f biodiversity loss. IJy a n s w e r ­
in g the q u estio n 'w h y ? ’, d etailed qualitative w o r k prov id es a critical to o l for
fin d in g so lu tio n s to s o c io e c o n o m ic problems.
T h e defining characteristics o f the root cau ses analytic a p p ro a ch are the
m u lti-lev e l character o f a n aly sis and the d e v e lo p m e n t o f c o n c e p tu a l m o d e ls.
M o s t o f the case studies presented here begin at the local level, w h e r e hiodiversity Josses are occurring, a n d then m o v e o u tw a r d in sco p e o f analysis a lo n g
a ch a in o f ex planation to understand the regional, national and international
fo r c e s at w o r k . E ach r o o t c a u s e s c a se stu d y d e scr ib e s a u n iq u e p a tte rn o f
lin k ag es betw een biodiversity loss and s o c io e c o n o m ic factors at various scales.
E ach creates a descriptive picture - o r a ‘con cep tu al m o d e l’ - o f ro o t causes
releva n t to the site, based on q u alitative and qu antitative data a b o u t the five
typ es o f factor discussed a b o v e . G iven that this analytic approach is intended
to address s o c io e c o n o m ic issues and that m an y o f the ca se studies w ere carried
o u t in r em o te areas w h ere data arc scarce, the con cep tu al m odel w a s a d o p te d
as a w a y to incorporate both quantitative anti qualitative data. Tlic em ph asis
o f th is a p p r o a c h is p la c e d o n u n d e r s ta n d in g h o w d iffe re n t fa c to r s d r iv in g
b io d iv e r s ity lo ss w o r k at d iffe r e n t scales an d h o w th ey are lin k e d to o n e
an o th er a n d to biodiversity loss.
T
he
A
n a l y t ic a l
C
A
lpro a ch
o n ceptu a l
M
; B
u il d in g
o d els
C o n c e p tu a l m odels provide a useful tool for exp lorin g the links betw een b io d i­
versity loss and s o c io e c o n o m ic factors and arc the central c o m p o n e n t o f the
c a se stu d ies. E ach o f the studies p r esen ted here built a c o n c e p tu a l m o d e l to
describe the prim ary r o o t causes and m e c h a n is m s driving b iod iversity loss at
the case stu d y site. T his section describes the key steps in co n str u c tin g a c o n c e p ­
tual m o d el. G iven the diverse circuinstanccs and the w id e range o f natural and
s o c io e c o n o m ic en v iro n m en ts in w h ich biod iversity loss is occurring, each case
stu d y te a m n e c e ssa r ily m a d e s o m e m o d if ic a t io n s to th e a p p r o a c h a n d d r e w
co n c lu sio n s app rop riate to the particular case. N ev erth eless, the basic steps for
each case stu d y w e re a literature review, d e v e lo p m e n t o f a c o n c e p tu a l m o d e l,
data co lle ctio n and revision o f the con cep tu a l m od el.
Literature Review
Each study first review ed the relevant general literature o n the five ca tego ries
o f s o c io e c o n o m ic factors from a variety o f socia l scien ces, w h ic h is d iscussed
in m ore detail in B o x 2 . 3 , a lo n g w ith the literature and e x is tin g data p ertin en t
to the particular ca se stu d y site and to h y p o th e tic a l r oo t cau ses for the site.
Development of Conceptual Mode!
A tlioroiigj) literature review |irovitletl a set o f h y p o th e s e s ahou r r oo t cnu.scs
th at served as the basis for an initial iteration o f the eoiieep ru al m od el. U sing
k n o w le d g e g a in e d from the literature review , the prelim in ary liy p o th e se s are
b est d r a w n up by a s k in g w h o , w h a t a n d w h y at each ste p o f the a n a ly s is ,
fo llo w in g a chain o f ex p la n a tio n . 'I’his first iteration o f the c o n c e p tu a l m o d el
a llo w e d the researchers to make d ecision s a b o u t further data c o lle ctio n . T his
m od el w a s s u b s e q u e n tly revised atid a m p lified w ith in fo rm a tio n collected for
the case study.
Such m od els w ill un d o u b ted ly be c o m p le x . H o w e v er , an effort w a s m a d e
to keep th em as sim p le , or p a r sim o n io u s, as p o ssib le w it h o u t sacrificing u n d e r ­
stand ing o f the nature o f the system . System s are often t o o c o m p le x to a n aly se
effectively in a sin gle m o d el, so .some stu d ies o p te d to break them d o w n into
s u b s y s te m s to fa c ilita te the a n a ly s is . F o r e x a m p le , tiie P a k ista n c a se s tu d y
created sep arate m o d e ls for each o f four types o f e n v ir o n m e n ta l d eg ra d a tio n .
Studies o f large region s, such as the Brazilian C crrad o a n d the D a in ih e Basin,
needed to w o r k d o w n tow ard the local as w ell as o u t to w a r d the m a c r o level
to get a full picture. For such studies it w a s a lso useful to d iv id e the large site
in t o sm a lle r area s w it h d istin ct c h a r a c te r is tic s in o r d e r to b egin a c h a in o f
exp la n a tio n at the local level. L ikew ise, th o se stu d ies that selected several sites
for com p a rison p u rp o se s, such as several m a n g r o v e areas in the Tanzania and
Pakistan case stud ies, initially considered each as a separate site, before g e n e r ­
alizing a b o u t r o o t cau ses across distinct sites.
Data Collection
T h e third step w a s g ath erin g further data. D e v e lo p m e n t o f the initial v ersion
o f the c o n c ep tu a l m o d el provided a basis for o r g a n iz in g data, defining gaps in
the existing data and setting priorities for further data c o lle c tio n , fn m o s t cases
z'f
lire K(ji)[ Causes uf iiitntiircrsily Loss
Box
2 .2 T h e C o n c e p t u a l M o d e l s
A conceptual m odel can be effectively represented in a diagram or description
that represents system com ponents and flow s betw een co m p on en ts. Such
diagrams identify key variables and illustrate the relations am ong variables in a
system (Hall and Day, 1977), In a diagram , the flows represented in the model
are usually causal relations and the diagram indicates the direction and im pact
of the flows. Although analysis starts with the local and works out to the global,
the conceptual m odel will not always appear as a direct chain of linkages across
Habilal leduclion
Agriculture
expansion
H.nhilal linymciilalion
Matiilol deyiadalion
Inctdenlai kiHing ol
wildlile
Timber
logging
Foresi lire
Changes in resources
use pallerns
toca/
Local governmeni
liscal dependence
on logging
Vesled mleiest
groups in logging
Breakdown ol
logging quota
syslem
N a tio n a l
In le r n a lio n a l
WWF Pingwu
Inlegraled Conservaljon and
Development ProjecI
Figure 2.3 C a n c cp t/u il M in lc l - C hina
Logging Irrms'
dependence on
logging
5' 9 :
9;
Stajctural adjustment programme
Tariff reforms
® cn
3 o
Policies and prescriptions of
World Trade Organization
□
3- 03 o
9;
»
Q}
®
cn
■_
^s0
9
1
X
Industrial policies
n
Conservation policies
Trade policies
International
=3
ST W
o
O
*o m ®
S 3
(D 9 . cn cu
Wc
i s
cn
O 0
3- cn
to
3L_t
Untreated
industrial waste
creating water
polluticn
Centralized
gro'Mh of
industries
■J
i
1
Promotion
of capital
intensive
technologies
Increased
demand for
export
Development ci
pons leading
to clearance cl
land
Taxation
ar,d water
policies
Reduced water use
efficiency in agriculture
causing increased
salinity and sedimenta­
tion in the delta
rT'
,
Lack of physical
infrastructure and
population pressure
in coastal areas
causing overtiarrest­
ing of mangroves
T
z r ~
r
irxreased
pollution in
coastal
areas
T
National
I
Higher
unemployment
in coastal
areas causing
pressure on
fishing
....Y
.
I
Higher prices
ol shrimp
causing
overfishing
Clearance o(
mangroves
Inadequate fevel of
governance with
regard to
biodiversity loss
CD CD
0 Cl
s
CS ^
03 d
w'
ET
3
D Z
0 << C
cn
^
“T
.....................
Percepfcns
and
attitudes, of
local
communi­
ties towards
mangroves
Environmental
policies and legal
framework
! |
Provincial
s a O ' Q- 2 .
C CD w o
9 - ^ 03 w
0
® a
0) TO
03 0
s
I
1 “
SS o S '
cn 3
«
a
1 .0
Local
=
B
I
3
= o
9
^
a ?
CL 9
5 .: o '
0 c
0 o Z
0
3
9 .(g
if
T
T
Mangrove Forests and Biodiversit/ Loss -
$ C7 ^
0) 0 0
<< 3-
cn 03 0
<. O
o
^
'c '’
5T
03
Ci
V~
I '
to
c
Cl.
'c:
,
ts
tr -
o
to
to
Kj
C-n
26
The Rtiiit Causes o f liioJiuersity Loss
this in clu d e d lo c a l data g atiicrin g , su cli as rap id ru ral a p p ra isal w ith su rv e y s,
p a rtic ip a to ry a p p ra isa l o r o ther social science iiictlio d s (K o q iie, 1 9 9 7 ). It also
in c lu d e d re se a rch on n a tio n a l and in te rn a tio n a l p o licie s aiid so c io e c o n o tn ic
tre n d s, su c li as pulicie.s on p rice s o r ch an g e s in p o litic a l sy.steins tlia t affect
lo c a l d e c is io n - m a k in g a h o u t re so u rce use. D r a w in g on the exp crti.se o f a
v a rie ty o f so c ia l sc ie n tists in each o f the resea rch team s helped e n su re that
a p p ro p ria te m eth o d o lo g ie s w ere eliosct) an d th:it the fu ll range o f so c io e c o ­
n o m ic cau ses w as co n sitlci cd.
T h e case stud ies did not attem pt to q u an tify the loss of hiodiver.sity at the
v a rio u s sites. Sites w ere chosen because there w as reason to believe that b io d i­
v ersity w a s being lost o r w as serio u sly threatened. T h e use o f p ro x ie s, su ch as
Joss o f forest c o v e r o r d e clin e in in d ic a to r sp ecie s, w a s reco m m e n d e d , but it
w a s fe lt char q u a n tific a tio n o f b io d iv e rsity lo ss w ith in the c o n te x t o f these
stud ies w a s not necessary. C e rta in ly fo r m a kin g d ecisio ns abo u t co n se rv a tio n
these so c io e c o n o m ic studies should be acco m p a n ied by detailed e co lo g ica l or
b io lo g ical stud ies.
R ev isio n of C o n cep tu al M odel
1 he fo u rth step w as a revision of the co n ce i’itua) mode) hasetl on the new tlafa.
S o m e o f the in itia l hypolliese.s w ere e o iilii in eil; o tiie is w ere rlispro veil and new
q u estio n s w ere ra ised . R e v isio n should co n firm tlia t the m odel lias been cle a rly
d escribed .
A
w ell-designed m odel balances q iia lita civ c an d q u an titative d ata to
e x p la in lin k s am o n g so cio e co n o m ic facto rs and lin k s between so c io e c o n o m ic
fa c to rs an d b io d iv e rsity loss. Ft w ill p ro v id e su fficie n t in fo rm a tio n ab o u t the
cau se s o f b io d iv ersity loss to supp ort in form ed d e cisio n s for tlic d e ve lo p m ciit
o f a so u n d c o n se rv a tio n strategy. It w ill p o in t to tiio se fa cto rs tlia t m u st be
a d d resse d in o rd e r to im p ro v e c o n se rv a tio n a n d w ill a llo w us to find tlio se
p laces in tlie co m p le x w eb o f so cio e co n o m ic facto rs w here w c can su ccessfitlly
in terven e to change patterns of rc.soiircc use.
E x p e r ie n c e w it h t h e A n a l y t ic a l A p p r o a c h :
S t r e n g t h s a n d W ea k n esses
T h e case stud ies presented in th is book each had to g rap p le w ith the v arie ty
an d c o m p le x ity o f the facto rs d rivin g b io d iv e rsity lo ss. T h e sites selected for
stu d y co ve r a w id e variety o f c iiv iro iiiiie n ta i p ressu res - from in d u stria l e x p a n ­
sio n threatening m ang ro ve h a b itat to liu n tiiig of thrcntcnctl species in tro p ica l
fo rests an d a g ric u ltu ra l p ressu res th re a te n in g fro n tie r a re a s. T h e stu d ie s all
attem pted to a n sw e r the satiic fund am ental q uesrions ab o u t the pervasive trend
to w a rd e n v iro m iicin a J cJiimge in the co n tex t of' a p a rtic u la r site:
•
W h a t are the u n d erlyin g so cio e co n o m ic forces and circu m sta n ce s d riv in g
b io d iv ersity loss.^
•
H o w are tliese ro o t causes interlinked.’
A PraDicwork fo r Analysing Diodiuersity L oss
27
B o x 2 .3 U s i n g l i i r . A i ’i - k o a c h : a B R i i i i - E x a m i m t
The application of the Analytical Approach in the case study of biodiversity loss
at the Calakmul Biosphere Reserve in south-eastern Mexico provides a practical
illustration of the development of a conceptual model.
Step 1: Literature Review
For the Calakmul study, literature on the local situation, on the nalional context
and on generally recognized causes of biodiversity loss was reviewed. This liter­
ature was drawn from a variety of fields including anthropology, economics,
policy analysis and demography. Literature specific to the Calakmul site
produced primarily by academic researchers and conservation groups included
studies of population growth, hunting patterns, attitudes toward development,
successes and failures of sustainable development programmes and resourceuse patterns. Relevant literature on the national situation included government
and academic reports on agriculture, forestry and protected area policies, as
well as on liberalization and impacts of international markets. More general literalure’ ® included studies on the effects of population growth, integration into
international markets and poverty. The literature review suggested the following
hypotheses, among others, which contributed to the construction of the initial
conceptual model.
Hypotheses specific to the Calakmul and Mexican case:
• At the local scale:
-Expansion of chilli production is causing extensive deforestation.
-Population growth is causing expansion of agriculture and deforesta­
tion.
• At the national scale:
-Liberalization of agriculture, including elimination of subsidies, is
causing expansion of commercial crops and a decrease in subsistence
production.
-Changes in land tenure laws are encouraging clearing and sale of
land.
^
• At the international scale: '
-Exposure to international markets makes local production of timber
and staple crops unprofitable.
-The North America Free Trade Agreement (NAFTA) is increasing
export-oriented commercial agricultural production.
General hypotheses relevant to the Calakmul and Mexican case;
•
Population growth is associated with environmental degradation.
•
Poverty prevents sustainable resource use.
Step 2: Development of a Conceptual Model
The initial conceptual model defines the scales and linkages believed to be most
critical in determining biodiversity loss. The model necessarily includes only
those factors that the initial review suggests are important. A series of questions
were used to construct a chain of explanation. These questions began at the
local level and moved outward to examine the layers of factors affecting biodi-
z
j
m e Kout Causes of UioJniersrty la>ss
versity in Ihe Calakmul region. The hypolheses found in the literature review
were used to answer these questions in the initial iteration of the conceptual
model. An example of the questions and answers used to construct a chain of
explanation follows.
Biodiversity is being lost in Mexico's Calakmul Biosphere Reserve in large
part because of the loss of forest to shifting agricullure. Who is converting the
forest? Small-scale farmers, including recent migrants from other parts of
Mexico, Why are they clearing forest in the protected area? Various contributing
factors include poor implem entation of environmental laws and governm ent
agricultural policies that promote forest clearing. Why do government policies
promote agricultural expansion? To help reduce the poverty of the rural popula­
tion. And so forth.
The initial model (Figure 2.5) emphasizes one local-level cause - population
growth - and two national-level causes - land tenure policies and liberalization.
Deforestation and agricultural land are taken as proxies for biodiversity loss.
Root causes
Proximate causes
Biodiversity loss
proxies
Growing local
population
New land
lenure policies
Saies o( land !□
coniinetcial inleresls
Trade and market Changes in prices ol
liberalizalion
commercial proclucls
Expanding subsistence
produclion
Daloreslalion
Expanding
commercial produclion
• limber
• agriculture,
especially cliilo
Increased
agricullural land
Inter rrulional demand
(prices)
Figure 2.5 D iagram o f Initial C onceptual M o d e l
Step 3: Data Collection
In order to confirm or reject the hypotheses incorporated in the initial model,
additional data were collected on local agricultural production (or subsistence
markets, local production of timber and olher forest products, local prices, local
income from government programmes, recent changes in land tenure, national
and international markets, deforeslation and impact of the protected area and
sustainable development program m es. Further literature was reviewed on
resource-use patterns and attitudes toward agriculture in similar regions in
Mexico, the probable impact of NAFTA and liberalization and lenure policies.
Serious gaps in data on the region could only be partially filled by the case
study. Physical and biological data on deforestation and species loss were
lacking and, while threats to biodiversity appear to be great, the impact as yet
has been small and therefore difficult to measure. Moreover, the isolation of the
region, its frontier character and Ihe rapid changes that are occurring in terms of
population growth, legal status of lands and political boundaries make socio-
A i'u t n ic u 'o r k f u r A n a ly s in g B i o d i u e r s i t y L o s s
29
econom ic data scarce and unreliable. The clandestine nature of many local
activities, such as logging and hunting, and the uncertain legality of others, such
as land clearing, make it difficult to get honest responses from local people or
government officials about activities in the area.
Nevertheless a number of the initial hypotheses were disproved or brought
into question in this step. For example, qualitative and quantitative data on chilli
production revealed that it is no longer making a significant contribution to defor­
estation, Inform ation on local markets revealed that local production, even
commercial production, has little relation to national or international prices and
therefore little connection to liberalized national policies that emphasize marketbased decision-m aking. The lack of links between Ihe local level and other
scales - economic, political, and temporal - emerged as one of the most perva­
sive characteristics of the region. As hypotheses were confirmed or disproved,
and corresponding new information was gathered, a clearer picture was devel­
oped of the root causes operating in Calakmul.
Step 4: Revision o f the Conceptual M odel
The revision of the conceptual model based on the new data and further litera­
ture review required new answers to questions about the relevance of various
scales and of the linkages across various scales to local resource use. The initial
literature review suggested that national policies affecting m arkets and land
tenure, along with international demand lor forest products, were primary drivers
of local resource use. However, the new data showed that the most important
linkages with the regional and national scales were probably through policies
and conflicts driving m igration to Ihe region rather than through markets.
Because of disjunctions between national policies and local conditions, national
Proximate causes^- Biodiversity loss
Root causes.
(proxies)
Regional laclors
• socioeconomic conllicis
• growing rural pcpulaltons
- g r o m n g lo c a l p o p u la t io n ■
-Ix k
ol lo c a l k n o w le d g e
..
Nalional policies and pollllcs:
• lack of lit wiih local conditions
• pofiticizations and corruption
■lackolonlorccrnoitl
Expanding subsistence
production..........................^
Delorestation
Ittegal hunting
!
Increase in
agricultural land
- r e s o in c e a p p f o i i i i m i i m a n d
s u b s is te n c e -le v e l s u p p o r ts
t o lo c a l p r o d u c e r s ...................
lllnrinl logging .............................Oveitrnrvr^sling o l lim ber
i
and wildlile
Poor links wllh commercial markels
- la ilu r e o f m a n y
development elloits ...........
F ig u re 2 .6 D ia g r a m o f R e v i s e d C o n c e p t u a l M o d e l
JO
The Root Causes of Biodivcizi.;, ........
policies designed to improve resource use may be having perverse effects in
the Calakmul region. For example, new policies intended to improve security of
land tenure may be promoting deforestation since forested land is not covered
by these policies. Local-level responses to external socioeconomic forces in
some ways promote biodiversity loss and in others may protect it. For example,
there is local opposition to the creation of the Reserve, but its creation has also
led to the development of a strong grassroots organization that supports sustain­
able activities.
The completed case study (see Chapter 11) begins with a description of
local population and resource-use patterns, which are the proximate causes of
biodiversity loss. From there it moves outward or upward in scale to describe
the various levels of socioeconomic factors that are shaping local resource use
patterns. Figure 2.6 shows some key parts of the revised conceptual model
described by the study. This revised diagram emphasizes growth of local
population due to regional factors, the inappropriateness of many policies to
local conditions and the marginality of the region to markets. These are factors
that must be addressed if conservation is to be achieved.
Each of the case studies adapted the approach dc.scribcd above to the particu­
lar context of the site, thus serving a.s a test of its u.sefuincss. Tiicse adaptations
are described in the study summaries. Tlie great variety of thought processes
behind the studies is clearly illustrated by the variety of conceptual model
diagrams that emerged. The studies reveal the flexibility of the framework but
also some o f its limitations as a tool for sorting out complex situations of
which knowledge is limited.
M ost of the studies took a comparative approach, looking at two or three
sites. This approach strengthens tlic conclusions hy illustrating how biodiver­
sity is affected differently at similar site.s liecau.sc of different socioeconoiiiic
pressures. For example, the three island.s studied in the Philippines ea.sc cacii
had different development experiences in large part because uf S|mnisli and
American colonial policies, with tlic icsult that one island remains almost
pristine while the others have lost much o f tlicir original biodiversity. The
comparative approach can also illustrate Iiow the same socioeconom ic
pressures have very different impacts at various sites because of different
environmental or socioeconom ic conditions. Tlic Brazil study sliows how
national government policies for agricultural tlcvclopmcnc were effective in
promoting large-scale commercial ngricultiire in some parts o f the Ccrrath)
region but ineffective in otiicrs, as a result of diriereiu uiulerlyiiig environmen­
tal and social conditions. In other cases, the reverse proves true. Jn the Danube
Basin, socialist policies have had similar effects on biodiversity and resource
use in two very different countries.
M ost of the case studies encountered similar problems in applying the
Analytical Approach described in this chapter, many of which were related to
data issues. Some of these issues were practical in nature, others more theoret­
ical. These included issues o f data avaiJabiJity and quantity, setting the
appropriate limits for the research and for the conceptual models, dealing with
A F n in ic to o r k f u r A n a l y s i n g B io ciii/ersi.j '
j
x
c o n t e x t u a l fa c to r s , d e t e r m i n in g w h a t c o n s t i t u t e s a r o o t c a u s e o f b io d iv e r sity
loss a n d a s s ig n in g p rio rity to d ifferen t c a u s e s .
Data A vailab ility
O n th e p ra ctic a l sid e, q u a n tita t iv e d ata w e r e s e r io u sly la c k in g for m a n y sites;
this la c k o f q u a n tita t iv e d ata m a d e it hard to b ack up q u a lita tiv e a ss e r tio n s .
■ S in ce m a n y o f th e s ite s arc r e m o te o r m a r g in a l a r e a s in d e v e l o p i n g c o u n t r ie s
th e lack o f d a ta is n o t su rp risin g . I > c n w h e n d a ta arc availal>le, for e x a m p l e
t h r o u g h g o v e r n m e n t c e n s u s e s , t l u y a rc o f t e n u n r e l i a b l e . T h e c a s e s t u d i e s
c o m p e n s a t e d for tliis lack in man)' in s ta n c e s by c a r r y in g o u t their o w n lo c a l
s u r v e y s a n d by d r a w i n g inferences from data at th e r e g io n a l or n a tio n a l level.
Tor e x a m p l e , fa c in g a lack o f d ata on tlic im p a c t o f lu in ia n a ctiv itie s o n fish
p o j iu la t io n s , the I’a k is ta n stu d y s u rv ey e d local resid en ts in the m a n g r o v e .areas
to find o u t w h a t c h a n g e s th ey had o b se r v e d in lo ca l fish c a t c h e s . L ik e w ise in
T a n z a n ia lo c a l s u rv ey s w e r e used to better u n d e r s ta n d lo ca l r e s o u r c e u se. T h is
ty p e o f d a ta c o l l e c t i o n s er v es t o s u jip o r t q u a lita tiv e a s s e s s m e n t s , siicli as the
a s s e s s m e n t th a t fish p o p u l a t i o n s h a v e d e c r e a s e d , b u t it is in s u ff ic ie n t to d r a w
q u a n tita t iv e c o n c l u s i o n s a b o u t th e im p a c t o f h u m a n a ctivities.
O n e o f the m o s t fr e q u e n t q u a iitita t iv c p r o b le m s fa c e d in th e c a se s tu d ie s
w a s th e lack o f hard d ata on b io d iv e r s ity loss. T o d e a l w it h th is p r o b le m the
s tu d ie s b a d to a s s u m e th a t e n v ir o n m e n ta l c h a n g e s , s u c h as la n d -c o v c r c h a n g e ,
h a v e d ir ect im p a c ts o n b io d iv er sity levels and th e r efo r e p r o v id e a u sefu l p r o x y
fo r b i o d i v e r s i t y l o s s . Ihir e x a m p l e , in th e s t u d y o f T a n z a n i a , th e l o s s o f
m a iig r o v c c o v e r an d iiia n g r o v c s p e c ie s is taken as in d ic a t iv e o f a m o r e g en eral
loss o f b io d iv e r s ity in m a n g r o v e e c o s y s t e m s . In a d d itio n , th e a n a ly t ic a p p r o a c h
is n o t w e ll d e s ig n e d for m a k i n g a q u a n t i t a t iv e link b e t w e e n h u m a n r e s o u r c e
u se a n d b io d iv e r s ity lo ss. T h e use o f p r o x ie s s u c h a s la n d -u s e c h a n g e for b io d i ­
versity lo s s m u s t ta k e in to a c c o u n t the f.act th at c h a n g e s in land u se o r h a b ita ts
w ill h a v e d iffer en t im p a c ts o n b io d iv e r s ity u nd er d iffer en t c o n d it i o n s . .Shifting
c u ltiv a tio n , for e x a m p l e , w h e n p ra cliscd o n a sm all sc a le m a y h a v e a m in im a l
o r e v e n b e n e f i c i a l i m p a c t o n b io d iv e r s it y ; o n n m o r e e x t e n s i v e s c a l e it w ill
h a v e m o r e .serious im p a cts; aiul e x t e n s iv e c o m m e r c ia l .agriculture w ith lie.avy
u se o f a g r o c li c n i i c a l s i.s lik e ly to d e s tr o y local e c o s y s t e m s . In th e c a s e o f tlic
D rn z ilia n C e r r n tio , th e e x p a n s i o n o f m e c h a n i z e d a g r i e u l t i i r c is a s s u m e d t o
c a u s e m o r e b in d iv cr.sity lo.ss th a n I lie e x p a n s i o n o f fa m ily f.armiiig. S im ita r
d if f e r e n c e s e x i s t b e t w e e n th e i m p a c t s o f s m a l l - s c a l e s e l e c t i v e l o g g i n g an d
c o m m e r c i a l c l e a r - c u t t in g a n d b e t w e e n artisan.al f is h in g a n d l a r g e - s c a l e
c o m m e r c ia l fish in g .
F i n d i n g th e p r o p e r b a l a n c e b e t w e e n q u a n t i t a t i v e a n d q ii.a lita tiv c d a ta
p r e s e n te d a th eo r e tic a l c h a lle n g e for m o s t o f the te a m s . In fact tliis issue often
r e s o lv e s its e lf, g i v e n th e lim ite d q u a n t i t a t i v e d a ta a v a i l a b l e a n d th e lim ite d
time a n d r es ou rc es available for c o n d u c t i n g these studies. Q u a iil itntivc d a t a o f
v a r y in g c o m p r e h e n s i v e n e s s an d r e lia b ilit y are u sed in e a c h o f the s tu d ie s to
s u p p o r t a q u a l i t a t i v e p ic tu r e o f b i o d i v e r s it y l o s s . T h e c o i i c e p t u a i m o d e l s
th e m se lv e s , h o w e v e r , arc n o t q nniitirativc.
J2
The Root Causes o f Biodiversity Loss
Setting Limits to the Models
Another practical problem faced by many cl' the case studies was in setting the
limits of tbc conceptual models, particulady limiting the timc-franic consid­
ered in the models, This is essentially a question o f deciding w hat scale is
sufficient for the invcstig ition, A related isstJc raised by several research teams
is the question of how vs e know when we nave reached the root cause. In fact
this type of analysis can b.c extended l .i .k indefinitely, revealing different
operatiojiaJ r o o t causes during differem iiistorical periods. Two of the case
studies, those of the Dannhc liasin and ih I’iiilippinc.s, took n long historical
perspective on biodiversity Joss. Tlris ap, ioacl) /rrovidcs a very useful under­
standing of the context iti which biodivci
loss is currently occurring, lii the
D anube Basin, for exam)'lc, the Cold Wi has largely determined the condi­
tions in Bulgaria and Slovakia that are sh i iing the use of rivcr-basin resources
today. This historical apjiroach can als* jiioviJc some indications of likely
future developments. In the Philippines, ^ clopincnC patterns on three islands
colonized sequentially reveal the likely p; :i, of future development.
The difficulty lies in determining wl . Ii of the causes of biodiversity loss
revealed through this type of analysis are
II operating - causes which may be
subject to intervention - and which arc li . orical factors that caji no longer be
clianged. WliiJc understanding the inini i ible historical context is useful, it
may go a step beyond the knowledge iiei : saiy lu slow or stop curicnt biodi­
versity loss. We can say that wc have reac: J a root cause when we have found
a point at whicli wc can successfully i[nt rvene in ordei' to alter the loss of
biodiversity. In ocher words, o u r intcrcsl 'i l ooi causes analysis is to uncover
die socioeconomic factor or set of factor:, driving biodiversity loss that can he
effectively changed so as to reduce o r el i.unale the pressure on biodiversity.
Root causes may be found at the local, r q iqiia) o r international levels, depend­
ing on where the factors he that dctcrmi.itflocal resource use. In many cases,
as the studies clearly show, there will not bcjoiic single root cause but rather a
complex network of root causes. This coa qijcxity is what the conceptual model
attempts to describe. Only o ntc we havc.-nidcar picture of the causal factors at
w ork can we begin to think about appropriate points of intervention.
On the more thcorcfica! side lies the i.ppccrn that tliis approach creates an
inherent bias toward the selection of disi;(Itt; generally historical and interna­
tional factors as the roo t causes of bioilftlersity kjss. Again the conceptual
models arc not expected to determine an l,l;l)ti/niaic ctiusc, but rather to present
a picture of the factors and the links amo ijjuhosc factois across various scales
to provide a complete explanation of biodiversity loss as it generally occurs, at
the local level, as the basis for halting bit Ijvcrsity loss.
Contextual Factors
''
■
Several of the studies pointed to some cau ipjl factors that did not fit easily into
the five socioeconomic categories listed ididvc. These causal factors included
the effects of war, ideology and hisrorica'icontcxt, as well as physical factors
such as the acccssibilitv of an area and iiauiral pi-occssc.s. W hat ail these factors
A Tmrneu-nrk for Andlysing Hiodiversity Loss
33
h.Tvc in ctJMimmi is t h a t t h e y a r c b e s t c l a s s i f i e d as c o n t e x t u a l e l e m e n t s . T h e y
m a y a p p e a r as r o o t c a u s e s o f b i o d i v e r s i t y lo.ss if w c t r a c e t h e c h a i n s o f e x p l a ­
n a tio n b a ck a s far as w c can g o . But b eca u s e (bey arc i m m u t a b l e historical or
physical facts they d o nor offer poin ts w h e r e w e can intervene to s t o w or halt
t h e J(jss o f b i o d i v e r s i t y . If w c l o o k at t h e c u n e n t e o n s c q u c n e c s o f th is c o n t e x t ,
h o w e v e r , w c m a y find s o m e p o i n t s f or i n t e r v e n t i o n . I’o r e x a m | 7 l c , in t h e e a s e s
o f V i e t n a m a n d C a m e r o o n , w a r has siiapctl c u rr en t p a tte r n s o f h io d iv c r s it y
l o s s . In V i e t n a m , w a r d r o v e l a r g e p o p u l a t i o n s h i f t s t h a t g r e a t l y a f f e c t e d l a n d
u s e a n d l i a b i t a t l o s s . In C a m e r o o n , g u n s r e m a i n i n g f r o m w a r s in n e i g h b o u r i n g
states facilitate w ildlife h un tin g. W h ile the historical facts o f th e w a r s c a n n o t
b e c l i a n g c c i , t h e p r e s e n t e f f e c t s , s u c h as l a n d - u s e c h a n g e a n d o v e r - h u n t i n g , c a n
b e a f f e c t e d . L i k e w i s e in t h e c a s e o f t h e D a n u b e c o u n t r i e s , S l o v a k i a a n d
f l u / g a r i a , t h e s o c i a l i s t i d e o l o g y i m p o s e d d u r i n g i m i c h o f thi s c e n t u r y h a s h a d
a n e n o r m o u s i m p a c t o n h i o d i v c r s i t y . T h i s h i s t o r y c a n n o t be c h a n g e d . H o w e v e r ,
t h e e n d o f t h e C o l d W a r h a s o j i c n e d t h e p o s s i h i l i i y o f c h a n g i n g m a n y o f th e
patterns o f b e h a v io u r that w e r e gen er ated by this ideology.
Phystcai factors present a similar c h a lle n g e (o o u r m u lersta n d iiig o f ca u s e s
o f h i o t l i v c r s i t y l o s s . S ev e r a l o f t h e e a s e s t u d i e s i to i n t e i l o u t t h e i m p o r r a i i e c o f
t h e a c c c s s i h i l i f y o f a n a r e a in d e t e r m i n i n g t h e f a t e o f h i o d i v c r s i t y . J h c
I’h i l i p p i n c s s t u d y , l o o k i n g a t t h r e e d i f f e r e n t i s l a n d s , f o u n d t h e m o s t r e m o t e
o n e t o l i a v e s u s r . i i n e d t h e l e as t e n v i r o n m e n t a l d a m a g e . L i k e w i s e t h e s t u d y in
Br az il f o u m l t h a t t h e m o s t r e m o t e r e g i t m w i t h t h e m o s t d i f f i c u l t t o p o g r a p h y
w a s least affected by agricultural e x p a n s i o n . A g a in , these physical co n tlitio n s
a r c l a r g e l y c o n t e x t u a l f a c t o r s t h a t d o n o t o f f e r p o i n t s ( or i n t e r v e n t i o n . Cl e a r l y ,
h o w e v e r , h u m a n i n g e n u i t y aiul th e tlrivc to o b t a i n n e w r e s o u r c e s lead to
i m p r o v e m e n t s in i n f r a s t r u c t u r e a n d t e c h n o l o g i e s t h a t a l l o w e v e n r e m o t e a n d
d i f f i c u l t a r e a s t o b e e x p l o i t e d . The i n c u r s i o n o f r o a d s i tito t h e s o u t h - e a s t e r n
forests o f C a m e r o o n a n d the Brazilian C e r r a d o has clia n g e d the use o f
r e s o u r c e s in t h e s e r e g i o n s . T h e q u e s t i o n o f p h y s i c a l a c c e s s a n d e n v i r o n m e n t a l
o b s t a c l e s t o s e t t l e m e n t o r r e s o u r c e u s e is t h e r e f o r e o f i n t e r e s t . P a t t e r n s o f
r e s o u r c e u s e a n d o p p o r t u n i t i e s f or c o n s e r v a t i o n o f b i o d i v e r s i t y are v e r y d i f f e r ­
e n t in a r e a s t h a t a r e r e a d i l y a c c e s s i b l e a n d o f f e r e a s y a c c e s s t o m a r k e t s a n d
o t h e r f a c i l i t i e s , f r o m t h o s e in a r e a s t h a t r e m a i n r e m o t e a n d i s o l a t e d . F o r
e x a m p l e , t h e s i t u a t i o n in t h e m a n g r o v e s o f P a k i s t a n w h i c h a r e f o u n d n e a r t h e
l a r g e u r b a n a r e a o f K a r a c h i d i f f e r s g r e a t l y f r o m t h a t o f t h e m a n g r o v e s in
T a n z a n ia , w h i c h remain relatively isolated.
.
Weighing Causai Factors
O n e o f t h e g r e a t e s t d i f f i c u l t i e s in e v e r y s t u d y w a s a s s i g n i n g p r i o r i t y t o , o r
w e ig h i n g , the v a r io u s roo t ca u ses. W h ile a tt e m p ts w e re m a d e to w e ig h these
c a u s e s quantitatively, n o n e o f these efforts w a s very satisfactory. F or e x a m p l e ,
t h e V i e t n a m s t u d y a s s i g n s r e l a t i v e w e i g h t s t o e a c h o f t h e c a u s e s , b u t th is d o e s
n o t tell us w h e r e i n t e r v e n t i o n wi l l b e m o s t e f f e c t i v e , s i n c e s o m e o f t b c c a u s e s ,
i n c lu d in g the c o n s e q u e n c e s o f several wars, c a n n o t be altered. T h e India stu d y
a t t e m p t e d a s t a t i s t i c a l a n a l y s i s , b u t t h e s h e e r n u m b e r o f v a r i a b l e s i n v o l v e d , as
H
The Root Causes o f liioiiiuersily Loss
w e l l as the lack o f data, l i m i t s th e rcJialhlity o f this t yp e o f anal ys is . B ecau se
t h es e c a u s e s o f t e n c a n n o t be m e a s u r e d q u a n ti t at i ve l y - m u c h less be m e a s u r e d
in a c o m p a r a b l e w a y w i t h o t h e r c a u s a l f ac to rs - th e final j u d g e m e n t s a b o u t
tiicir relati ve i m p o r t a n c e m u s t be qua li ta ti ve . T o tliis e n d , the d i a g r a m s used to
i l l u s t r a t e t h e c o n c e p t u a l m o d e l s arc u s e f u l , s i n c e t h e y i n d i c a t e n o t o n l y th e
d ir e ct i m p a c t s o f a p a r t i c u l a r f a c t o r b u t a l s o b o w t h a t f a c t o r is l i n k e d w i t h
o t h e r s o c i o e c o n o m i c f actors a ff e ct in g biodiversity.
O n e r e as o n >vby it is dif fi cul t b o t h to seJcct tlic r o o t c a u s e s a n d to w e i g h
v a ri o u s c a u s e s is b e c a u s e , in m o s t c a s e s , b i o d i v e r s i t y l oss is d r i v e n or d e t e r ­
m i n e d by sev eral factors. W e c a n s a y t hat bi od iv er s it y loss at a parti cu lar site
j.s o u e r - f i c l e r m i n e d in th e s e n s e that, w h i le th es e f actors arc c l os el y i nt erl inke d
l i i r o u g h c o m p l e x r e l a t i o n s h i p s , cacJ) o n its o w n m a y be s u f f i c i e n t to c a u s e
b i o d i v e r s i t y l o s s . In o t h e r w o r d s , a d d r e s s i n g o n e c a u s e o f b i o d i v e r s i t y l o s s
a l o n e j n a y h a v e little i m p a c t if seve ral o t h e r s a r c a l s o o p e r a t i n g at t he s a m e
site. W h i l e o n e c a u s e or an ot li cr m a y p r e d o m i n a t e in a parti cul ar s e t o f c i r c u m ­
s t a n ce s, m a n y f ac to rs arc o f t e n p u s h i n g in the s a m e direction: m o r e o v e r they
tend to re in fo r ce eac h other. In the M e x i c o ca.sc, hir e x a m p l e , a prorectet,! area
is t h re a t e n e d n o t o n l y by mi g r a t i o n to the area b ut a l s o by g o v e r n m e n t p ol ic ie s
ill a g r i c u l t u r e a n d forestry. T l i e s c p o l i c i e s a g g r a v a t e the i m p a c t s o f th e n e w
I 'opul ai ioi i . Even in i so la ted arca.s, wl i crc m u c h b iod iv er s it y l os s is o c c ur r i ng ,
a n u m b e r o f c a u s a l f ac tors b o t h a t a n d b e y o n d the l o ca l level arc likely to be
at w o r k . I’or e x a m p l e , in th e r e m o t e forests o f C a m e r o o n , h u n t i n g is i n c r e a s ­
i ng n o t o n l y b e c a u s e o f i n c r e a s e d d e m a n d in th e c i t i e s a n d a b r o a d f o r
h u s h m e a t , b u t a l s o b e c a u s e l o g g i n g , d ri ve n in |)art by m a c r o e c o n o m i c p oli cie s,
is fac il i ta ti ng a cc e ss to the re g io n. T h e f in d i n g s f r o m the c a s e s t u d ie s a n a ly s e d
ill C h a p t e r 4 p r o v i d e furt her d i s c u s s i o n o f the p r o b l e m o f ov er -d ct ern ii nat io ii .
A r r iv in g
at
R e c o m m e n d a t io n s
I n CSC c as e .Mudics g i v e us a very c o m p l e t e , if n ot a l w a y s q u a n t i t a t i v e l y mc a s u r a hl c, pi ct ur e o f w h a t is h a p p e n i n g a t e a c h site s t u di ed . W e l earn a b o u t w h a t
c, usal f a c t o r s , a n d h o w m a n y , arc d r i v i ng b i o d i v e r s i t y Joss a n d a b o u t l i o w
th ey arc i i uc i l i i i ke d . O n c e w c h a v e this c o m p l c i c picture it is f eas ibl e to select
ilie a p p i o p i i a t c p o i n t s f o r i n t e r v e n t i o n t o slov. or hal t b i o d i v e r s i t y loss. T h e
c o n c e p t u a l m o d e l s d e v e l o p e d in the c a s e studic: p r o v i d e a crucial i np u t t o a n y
i l c c i s i o n - m a k i n g a b o u t h o w t o a ddr e ss bi odi vrr si ty l oss at the s t u d y sites. O f
c o u r s e , tl cfini ng th e pi'oblein a n d the c o n t e x t ii ^vhtcil w c m u s t w o r k is o n l y
the first s te p. A t th e c o n c l u s i o n o f the s t u d i c the res earch t e a m s e a c h m a d e
\ c r y p rel i mi nary r e c o m m e n d a t i o n s for the nev i steps.
T o m o v e fr om these a nal yt i c s tu di es to acli. ns for b iodi vers it y co jis crv ati on
V ill require a n o t h e r proce ss - a political p roci ;s to m a k e d ec is i on s a b o u t h o w '
tl) addres s the p r o b l e m s a n a l y s e d b y tlic studic .. 'I'lic factors aff ecti ng b iod iv er­
si ty w i l l n e e d t o be a d d r e s s e d at a va ri et y o l l e v e l s . S o m e i ss ue s w i l l be best
a d d r e s s e d t h r o u g h l o c a l p ro j e c t s , b u t m a n y i f the s o c i o e c o n o m i c i s s ue s c a n
o n l y be a d dr e ss ed at a regional , na ti ona l o r son; times ijitcrnational level. M a n y
A I'riinicirorh for Analysing Biodiversity Loss
35
i s s u e s wi l l neetl t o lie a d c l r c s s c J :it s e vc r nl l ev el s o r s c a l e s in o r d e r t o e ffec t a
real c h a n g e . Fo r e x a m p l e , a d d r e s s i n g p o o r e n f o r c e m e n t o f l o g g i n g res tri ct ions a p r o h l e m c o m m o n t o m a n y o f th e s t u d y s ites - m a y rctiuirc i m p r o v e m e n t s in
th e l a w, w h i c h m u s t he a c c o m p l i s h c i l at th e n a t i o n a l level . It m a y i n v o l v e train
i ng o f e n f o r c e m e n t o f f i c i a l s , w h i c h m u s t h e d o n e a t a r e g i o n a l l evel , a n d it ma
i n v o l v e e n v i r o n m e n t a l e d u c a t i o n targ.ctcd t o th e l o c a l c o m m u n i t i e s .
T i i c r e c o m m e n d a t i o n s p r e s e n t e d in t h e s t u d i e s h er e a r c i n i t ia l , i ndicativi
s u g g e s t i o n s t h a t s h o u l d b e fe d i n t o a p a r t i c i p a t o r y p r o c e s s w i t h t h e rclcvaii
s t a k c h u l t i c r s . T h e c a s e s tu il ic s c a n s e r v e as th e bas is for a s t a k e h o l d e r analys is ,
p r o v i d i n g i n f o r m a t i o n o n w l u i n e e d s to h e i n v o l v e d , w h e r e t h e g r e a t e s t o p p o s i ­
t i o n t o c h a n g e wi l l b e f o u n d a n d w h e r e p a r t n e r s c a n be f o u n d f or p r o m o t i n g
c o n s e r v a t i o n . M o s t i m p o r t a n t l y , th e c o n c e p t u a l mot k' i s d e v e l o p e d b y th e studies
p r o v i d e th e b as is for s e l e c t i n g t he t ar get i.ssucs a n d t ar get a r e a s w h e r e i n t e r v e n ­
t i o n f o r c o n s e r v a t i o n wi l l h e m o s t e f f e c t i v e . T h e c a s e s t u d i e s a l s o p r o v i d e the
basis for ed u catin g p eop le a b o u t the causes o f biodiversity loss and for debat­
i n g t h e b e s t s o l u t i o n s t o t h e p r o b l e m . Final r e c o m m e n d a t i o n s d e r i v e d f r o m the
p a r t i c i p a t o r y p r o c e s s wi l l p r o v i d e th e [lasis for an a c t i o n p l a n . A l t h o u g h i m p o r ­
t a n t s i m i l a r i t i e s e m e r g e d f r o m t h e s e c a s e s t u d i e s , e a c h c a s e is u n i q u e a n d
s o l u t i o n s w i l l a l w a y s n e e d t o be c a r e f u l l y a d a p t e d t o e a c h site.
POLLUTION CONTROL IN
THE SOUTH AND NORTH
A Com parative Assessment of Environmental
Policy Approaches in India and the Netherlands
O J . K u ik
M .V . N ad k arn i
F .H . O o ste rh u is
G .S . Sastry
A .E . A k k e r m a n
lNrx>-DuTc; ii S r u n u i s t)N Di:vi:i.i>i’m k n t
A l t k k n a t t v i ;s -
Sago Publications
N e w Delhi/Thousand O aks/London
21
C opyrighi @ in d o -D u tc h Progratm ne on A liernaiivex in D evctopm eni (I D P A D ),
1997
All rig h u re se rv e d . No part of this hook may be rep ro d u c e d o r utilised in any form
or by any m e a n s, electro nic o r mcch.anical, including p ho to co p y in g , recording or by
any inform ation s to rag e o r retrieval systcrn, without perm ission in writing from the
publisher.
First p u b U d ic J in 1997 hy
Sage Publications India Pvt Ltd
M-.12 G re a te r Kailash M a r k c t- I
New Delhi 110 (WK
Sage Ihjbiications Inc
2455 Teller Road
T h o u s a n d O a k s . C alifornia 91320
^ 8 ^ Publications Ltd
^ Oonhitl Street
L o n d o n E C 2A 4PU
Pu b lished by Tejeshw ar Singh for Sage Publications India Pvt Ltd, phototypcsct
by Pagcwcll Photoscttcrs, Pondicherry, and prinlcd al Ram Prinlograph, Delhi,
Library of Congress CataJoging-in-Publication Data
Pollution control in the south and north; a comparative a.sscs.smcnt of environmental
policy .npproachcs in India and the N etherland s / O .J. Kuik . . . (et al.].
P
c m . — (In d o -D u tc h studies on d e v e lo pm e nt alternatives: 21)
(c : ;>lk. p a p e r)
Includes bibliographical references and index.
1. Pollution— E n v iro n m e n ta l aspects— India. 2. P ollution— Environm ental
aspects— Netheiiaiids. 3. Enviroruncnta] protection— India. 4. EnvironmentaJ
protection— Netherlands. 5. Environmental policy— India. 6, Environmental
policy— N c ih c ria n d s. I. Kuik. O n n o , 1955II. Scries.
TD1R7 5.I4P65
1997
.Jf).7.7’0()954— dc21
97-27314
ISBN: 0 -7 6 1 9 -9 2 0 4 -9 (U S -H B )
81 -7 0 3 6 -6 5 6 -9 (fn dia-H B )
Sage P rod uc tio n T e a m ; Eve/yn G rorgr. O P. B hasin a n d S a n to sh Rawat
INSTRUMENT CHOICE IN THEORY
AND PRACTICE
O 'ln m a n d and co n tro l (h e re a fte r C A C ) type in strum en ts are c o m ­
m o n in c u r r e n t e n v iro n m e n ta l p o lic y in the N o rth and S o u th (se e
S e c tio n '; 1.3 an d 1 .4 ). f( is in c rc a s in g lv re a lise d that the d e m a n d s
lo r a h ro a d e n in g and m ien sifiea tio n o f en viro n m e n tal p o licy cannot
be m et w ith this type o f in s ir u m c n l a lo n e . S h o rtc o m in g s o f the
C A G ty p e in .stru m c m s that are o fte n m en tio n ed a r c : n o n -o p tim a l
a llo c a t io n o f a h a tc m e iii m easu rc.s a c ro ss .sources an d la rg e in fo r m ­
a tio n a tu i e n fo rce m e n t costs to the a d m in is tra to r. It is a w e lle s ta b lis h e d re su lt o f e c o n o m ic th e o ry that if p o llu tin g so u rce s face
(.lifie rc n t m a rg in a l a b a te m e n t c o s ts , a C A C ( ‘ s ta n d a rd -s e ttin g ’ )
a p p ro a c h to p o llu tio n c o n tro l w ilt be m o re e x p e n s iv e th a n m a rk e t
b ased a p p ro a c h e s w'hich a llo w th ese sourcc.s m o re f le x ib ilit y in
" (• n ir o llin p p o llu tio n . A n im p o rta n t p ro p o sitio n in the e c o n o m ic ''
al p o llu tio n c o n tro l is that the co st o f tic h icv in g a g iven re d u c tio n
n e m is s io n s w ill he m in im ise d if th e m a rg in al co sts o f c o n tro l are
.‘t |i!a lis c d fo r a ll e m itte rs ( T ic t c n h e r g IW 3 a ). In m ost s itu a tio n s
F A C ty p e in s t r u jiic iils w ill not p ro d u c e th is Ica st-co sI s o lu tio n . In
tlie I In ite ti S ta te s , a n u m b e r o f s tu d ie s h ave c o m p a re d the co sts o f
the c u r r e n t re g u la to ry ( C A C ) a p p ro a c h o f U S a ir p o llu tio n c o n tro l
w ith th e (e a le u la tc tl) least-cost id e a l. T h e ra tio o f C A C costs to the
le a s t-c o s t itie a l ranees fro m 1.7S to 2 2 , (h ill is . the c u rre n t c o n tro l
Cos ts a re 7H to 2 H I0 per cent m o re e x p e n siv e th an th e o re tic a lly
n e c e s s a ry to m eet the a m b ie n t a ir q u a lity stiin d a rd s re q u ire d by
U s la w (T ic t e n b e r g 19 92 a). T h e s e cost d iffe re n c e s a re im p re s s iv e ;
thev w a rra n t the scarcli tor m ore e fficie n t in stn im c n ts fo r p o llu tio n
eciril r o l.
hiM runrt'ni ChuH f sn fh p o ry u n J Prac/u'e
A sec o n d d ra w b a c k of (he iraditiona! C A C instrum ents of
environmental prtlicy is ilieir increasing burden on tiic udminisirtiior.
E xponentiaily rising information and enforcem ent costs o f e.xptmding and increasingly complex environm ental regulations are bound
to soo n e r or later hit the limits of the ctipabilitics and means of any
tidininistraiion.
Efficiency an d administrative feasibility are the main a rgum ents
_ for tl)c search of new (com binations of) environmental i>olicy
instrum ents. Since long, economists liavc advoctitcd the use of
m arket based regulatory instrum ents (charges, tradable permits).'
M ore recently atten tion is tilso focu.scd on the c o m plem entar)’ role
of private, judicial instruments (see T icien bcrg 1992b).
As m ore policy instruments a re identified and added to the
in.strument set which coii/d be used, the question that natuially
comes up is which instrunictUs sh o u ld be u.sed for particular p u r­
poses an d in p articular circumstances. Policy-oriented theories of
optim al instru m en t choice have been ticvcloped in recent years.
Section 2.2 briefly revicw.s so m e o f the literature on this subject.
H o w e v e r, befo re that, the following section examines the cuieria
to judge the performance of policy instruments in the environmental
field.
2.1 C R I T E R I A
In o r d e r to ju d g e the performtmce of policy instruments, pcrlorinance criteria should be established. Several criteria have been
suggested by different authors; it would be o f little use to reiterate
all these criteria here. In a recent publication, O E C D has distmguishcd five sets of criteriti lo assess the iierformtmee of cnviioninentid policy instrumenl.s (O E C D 1991).
E n v iro n n ie n ta l effe c tiv e n ess
Tlie main purpose of environmental policy iii.struments is to achieve
certain en viro nm ental goals or targets. O ne can stiy that e nv iron ­
mental effectiveness is the single most im portant criterion. A n
iiisLrumenl wliicli i.s not effective in ieachirig it.s target d o e s not
perform well, irrespective of its p erfo rm ance with respect to oth e r
criteria. Effectiveness depends on ilie compliance of the polluting
agents. As discussed in Section 1.1, this compliance can be of a
52
I ’lil/nriiiii ( tiiiti.d III th e SiiKit' , i i i j \i ir fl '
v n liin la r y n a tu re (c < > n iim in ic a :iv c in s t r iin ic n ls ) . th e re can he
liiia n c ia l in e e n tiv o s In . <nnply (c e n iio n n V rn s tn irn e ii(s ). or it e a ii he
le g a lly e n fo rc e d (d ire e l re g u la tio n ), h fle e tiv e n c s s is e s s e n tia lly a
d y n a m ic c o n c e p t. E n v ir o n n ie n ia F p o lic y in s tru n ic iits a rc a p p lie d in
a c h a n g in g w o rld . A set o f n ic a .s u rc s w liic h has h c c n e ffe c tiv e in
one sot o f c irciim .sia n cc.s (e c o n o m ic and e n v iro n m e n ta l) is not
n e c e s s a rily e ffe c tiv e in a n o th e r s e t. In s tru m e n ts sh o u ld th e re fo re
be al^lc lo a rlju st to c h a n g in g e c o n o m ic and e n v iro n m e n ta l c ir c u m ­
s ta n c e s .
E c o n o m ic e flic ie n cy
E n v ir o n m e n t a l p o lic y in .s tru m c n ls .should a tta in e n v iro n m e n ta l
target.s at least (s o c ia l) e o sts. In e ffic ie n t a p p ro a c h e s to p o llu tio n
c o n tro l w a.sic sca rce re s o u rc e s w h ic h co u ld be used in o th e r w a y s
to g e n e ra te h ig h e r le v e ls o f e n v iro n m e n ta l q u a lity o r lo p ro v id e
o th e r g o o ds and s e rv ic e s . W ith re sp e c t to e ffic ie n c y a ilis tin c iio n
sh o id d be m ad e b e tw e e n .static a n d d y n a m ic , o r sh o rt-te rm and
lo n g -te rm c ffic ic n e y . In s tru m e n ts w h ic h o ffe r the sa m e sta tic o r
sh c 'rt-lc rm e ffic ie n c y m a) d iffe r in th e ir d ynam ic e ffic ie n c y , n a m e ly ,
the in c e n tiv e th e y o ffe r to s e a rc h fo r n e w , e n v iro n m e n t-s a v in g
tci lin o lo g y in the lo n g er ru n . A n o t h e r d istin c tio n th at can be m ad e
is lie lw c c n in stru m e n ts th at d is to rt re la tiv e p ric e s (b y f iir in sta n c e
m a k in g c a p ita l e q u ip m e n t a r t if ic ia lly c h e a p ) and those th at do
n o t .’
E q u ity
•
A s a r u le , e n v iro n m e n ta l p o lic y in s tru m e n ts affect th e d is trib u tio n
o f i(!co m c and w e alth . In a w a y , iJie y ;ire m eant to do so . T ra d itio n a l
rig h ts (to p o llu te o r to u sc -u p re s o u rc e s ) a rc ta k e n a w a y fro m o n e
g ro u p o f a c to rs and a rc tra n s fe rre d to o th e r a cto rs (a t h o m e o r
a b ro a d , p re se n t o r fu tu r e ). H o w e v e r , the d is trib u tio n a l im pact.s o f
a p a r t ic u la r typ e o f in s tru m e n t m a y be ju d g e d u n a c c e p ta b le fro m
the p o in t o f v ie w o f in c o m e p o lic y , c .s p c c ia lly if so m e fo rm o f
c o rre c t iv e a c tio n ( e .g .. s id c - p a y m c n is ) is not fe a s ib le o r p r a c t ic a l.
It i.s im p o rta n t to note th a t d iffe re n t typ es o f in s tru m e n ts h a v e
t iif f c r c n t d is trib u tiv e c o n se q u e n c e s .
Instrumeni Choice in Theory and Practice
3 3
A d m in istrativ e feasibility and c o sts
A
m a j o r p r e c o n d i t i o n to t h e e f f e c t i v e n e s s o f p o l i c y i n s t r u m e n t s is
th a t t h e y a r e e n f o r c e a b le at r e a s o n a b l e co sts. E f f i c i e n c y d o e s n o t
o n ly d e m a n d that the a d ju s t m e n t a n d im p le m e n t a t io n c o s t s o f th e
p o llu tin g ag en ts are m in im is e d
b u t it a l s o r e q u i r e s t h a t t h e t o t a l
co sts o f a d ju stm e n t, im p le m e n ta tio n , en fo rce m en t an d a d m in istra ­
tio n a re m in im is e d . E n f o r c e m e n t c o sts m a y th e re fo re be an im p o r t ­
a n t e l e m e n t in t h e c h o i c e o f i n s t r u m e n t s .
A c c e p ta b ility
O p p o s i t i o n o f t a r g e t g r o u p s t o a p a r t i c u l a r i n s t r u m e n t , b e c a u s e it
is j u d g e d
‘u n f a ir ’ o r
to o c o m p l e x ,
m ay
ra ise e n f o r c e m e n t
co sts
c o n s id e r a b ly a n d m a y th e r e f o r e n e g a tiv e ly affect the o v e r a ll e f f e c ­
tiv e n e s s a n d e ffic ie n c y o f th e in s tr u m e n t.
A c c o r d i n g to O E C D ,
th e a c c e p t a b ilit y o f in s t r u m e n ts c a n be in c re a s e d b y; a d e q u a te a n d
t i m e l y i n f o r m a t i o n o n s p e c i f i c f e a t u r e s o f t h e i n s t r u m e n t to t a r g e t
g r o u p s ; c o n s u l t a t i o n w i t h t h e t a r g e t g r o u p s in t h e e x e c u t i o n o f t h e
i n s t r u m e n t ; a n d b y p r o g r e s s i v e i m p l e m e n t a t i o n , th at is, p o l l u t e r s
s h o u l d b e a b l e to a d j u s t to t h e n e w s i t u a t i o n .
T h e i n t e r n a t i o n a l a c c e p t a b i l i t y o f t h e i n s t r u m e n t is i n c r e a s e d i f
t h e i n s t r u m e n t is in c o m p l i a n c e w i t h t h e P P P . I n t e r n a t i o n a l c o m ­
p e titiv e n e s s
e m p lo y
and
d iffe re n t
trad e
m ay
be
e n v iro n m e n ta l
d isto rte d
p o lic y
if d i f f e r e n t
in stru m e n ts
c o u n trie s
for
sp e c ific
p u r p o s e s . T h e e x t r e m e c a s e is th a t o n e c o u n t r y w o u l d su b s id i.s e a n
in d u s try
to a b a t e p o l l u t i o n
w h ile
an o th er c o u n liy
w o u ld
ch arg e
th is in d u s t r y fo r the s a m e p u r p o s e . T h e P P P h a s b e e n a d o p t e d b y
O E C D
c o u n t r i e s to a v o i d t h i s k i n d o f i n s t r u m e n t - i n d u c e d d i s t o r ­
t i o n s . It d e m a n d s t h a t t h e p o l l u t e r s h o u l d b e a r t h e c o s t s o f c a r r y i n g
o u t t h e m e a s u r e s d e c i d e d b y t h e p u b l i c a u t h o r i t i e s to e n s u r e t h a t
t h e e n v i r o n m e n t is in a n a c c e p t a b l e s t a t e . I n o t h e r w o r d s , t h e c o s t s
o f th e se m e a su re s sh o u ld
b e r e f l e c t e d in t h e c o s t s o f g o o d s a n d
s e r v i c e s w h i c h c a u s e p o l l u t i o n in p r o d u c t i o n a n d / o r c o n s u m p t i o n .
S u c h m e a s u r e s sh o u ld nut be a c c o m p a n ie d by su b sid ie s Ib a t w o u ld
c r e a te sig n ific a n t d is to rtio n s in 'ln t c r n a t io n a l tra d e a n d in v e s tm e n t
(O E C D
1 9 8 6 ) . M c n c c , P P P is b a s i c a l l y a ‘ n o n - s u b s i d y ’ p r i n c i p l e .
N o t w it h s t a n d in g th e n o n - s u b s id y c h a r a c t e r o f the P r in c ip l e , f in a n ­
cia l a ssis ta n c e for e n v ir o n m e n t a l co n tro l m e a su re s h as not b e e n
ru le d
out
in
actu al
im p le m e n ta tio n
of
the
P rin c ip le
(e .g ..
by
J4
i ’utliilinii C.ciniral in the South a n d AVir.-
O E C D in 1972 iind the E u ro p e a n C o m m u n ity in 1986). S u b sid icfor R & D in clea n tc e h iio lo p y , o r in cases w h e re the costs d
p o lh itio n red u ctio n for the in ilu s lry w ould he tlisp ro p o rtio n a llv
high, a rc reg ard ed as not co n flic tin g w ith the P P P . In O E C D
c o u n trie s , fin a n c ia l assistance is w itlc.sp rcad : they have e ith e r
rcg :in.Icd som e fo rm s o f fin a n c ia l assistance as P P P -c o m p a tib lc o r
as a cce p tab le e xce p tio n s,
Funtilly, en viron m ental policy instrum ents m ay affect internatioiuil
c o m p e titive n e ss and tra d e , and p o licy tirca s. such as eco n o m ic
p o lic y , in co m e p o licy ;ind se cto ral p o licie s. In e va lu atin g the p e r­
fo rm an ce o f p o lic y in s lriim c n is th e ir im pacts on these p o licy area',
should also be c n n sitlc rc d . E c o n o m ic p o licy w ill co n sid er the
im pticts o f e n v iro n m e n ta l p o lic y in stru m en ts on the level o f p u b lic
e x p e n d itu re , g o vern m en t budget, in te rn a tio n a l co m p e titive n e ss,
and in g en era! it w ill c o n sid e r w h e th e r the p o licy in stru m en ts
increase o r d ecrease m arket e ffic ie n c y and f le x ib ilit y .’
2.2 I N S T R U M E N T C H O IC E IN T H E O R Y
It is g e n e ra lly ack n o w led g e d that no single type o f in strum en t is
su p e rio r in e v e ry situ atio n (s e c , fo r e x a m p le . O E C D 1991). M o re ­
o ver. it is accepted that different types of instrum ents can com ple­
ment each o th e r. N e v e rth e le ss , it m ay he possible to id e n tify
p rio rity in .stru m cn ts in .specific p o licy co n te xts. S e v e ra l autho rs
have evaluated the potential perform ance of different (com binations
o f) e n v iro n m e n ta l p o licy in stru m e n ts in sp e cific p o licy co n texts
(e .g .. D o w n in g 1984; B o h m cSt R u sse ll 1985; B a u m o l & O ates
199(1; B o v c n b e rg ct a l. 1991). S u m m arise d below are the m a jo r
fin d ings on in stru m e n ts fo r in d u stria l p o llu tio n co n tro l.
Communicative instruments
Information on clean alternatives, voluntary environm ental m an­
agem ent s c h e m e s within firms, moral suasion and so forth, may he
cnvin m m an xaU y c ffc c u v c if th e adaptation required is relatively'
inexpensive or jf it provides hcncfit.s to Ihc firm. T h ese benefits
may be due to a reduction in costs ( ‘pollution prevention pays') or
due to a more environment-friendly image in the consumer market.
H o w e v e r, when there arc clear e c o n o m ic di.sadvantages to firms in
!riilrunirni C hoice in Theory anil Prachce
jj
a d ju s t in g th e ir b e h a v io u r , th e e ffe c tiv e n e s s o f p u re ly c o m m u n ic a t iv e
D o w n i n g ( 1 9 8 4 , p. 2 9 4 ) p u t s it;
i n s t r u m e n t s is d o u b t f u l . A s
. .
a s k i n g p e o p l e to a c t in t h e s o c i a l i n t e r e s t w h e n it is a g a i n s t t h e i r
s e l f - i n t e r e s t i s l i k e a s k i n g w a t e r to f l o w u p h i l l ’. B o h m
&
R u s s e ll
(1 9 8 5 ) id e n t if y th re e situ a tio n s w h e r e c o m m u n ic a t iv e in s tr u m e n ts
{m o ra l
su a s io n )
c o u ld
be
best
used.
F irs t,
if t h e
use
o f o ther
i j i s l r u m e n t s is b l o c k e d f o r p o l i t i c a l r e a s o n s . T h i s c o u l d b e t h e c a s e
il t h e r e is n o t y e t e n o u g h s o c i e t a l s u p p o r t f o r l e g a f a c t i o n . I n f o r m ­
a lio n
and
m o r a l su a sio n
can
then
be
a f ir s t s t e p
to w ard s
m ore
s t r i n g e n t p o l i c i e s . S e c o n d , it m a y b e t h a t t h e m o n i t o r i n g r e q u i r e d
f o r e c o n o m i c i n c e n t i v e s c h e m e s o r r e g u l a t i o n is t e c h n i c a l l y i n f e a s i b l e
o r p r o h i b i t i v e l y e x p e n s i v e . T h i r d , in c e r t a i n c a s e s w h e r e t h e r e is
n e e d f o r im m e d ia t e a c tio n ( e . g . , e x t r e m e ly h a z a r d o u s s m o g le v e ls )
o r d in a r y in s t r u m e n t s m a y be to o c u m b e r s o m e o r to o slo w .
D u tch
e .x te n t
e c o n o m ic and e n v iro n m e n ta l
than
th o se
o f the
U n ite d
p o lic ie s a re ,
States,
based
on
to a g r e a t e r
a
m odel
of
c o n s e n s u s b e tw e e n g o v e r n m e n t , tr a d e u n io n s a n d in d u s try . T h e r e ­
fo re.
it is n o t s u r p r i s i n g t h a t
in t h e N e t h e r l a n d s c o m m u n i c a t i v e
i n s t r u m e n t s p l a y a g r e a t e r r o l e in e n v i r o n m e n t a l p o l i c y t h a n in t h e
U n i t e d S t a t e s . T h e y a r e c a s t in t h e f o r m o f v o l u n t a r y a g r e e m e n t s
or
c o v e n a n ts ’ b etw een
C o ven an ts
ty p ic a lly
governm ent
in c lu d e
and
t|u a n tila tiv c
b ran ch es
targ ets a n d
of
in d u stry .
a sp e c ifie d
in iie t a b le . T h e y a re im p lic itly o r e x p lic it ly b a c k e d u p by the th re a t
o l r e g u l a t o r y a c t i o n if t h e s e ta rg et.s a r e n o t m e t v o l u n t a r i l y . A c c o r d ­
i n g to B o v e n b e r g et a l . ( 1 9 9 1 ) t h e y o f f e r i n d u s t r y a g r e a t a m o u n t
o f f l e x i b i l i t y in m e e t i n g t h e s e t a r g e t s a n d c a n t h e r e f o r e b e e f f i c i e n t .
T h e a c c e p t a b i l i t y o f v o l u n t a r y a g r e e m e n t s b y t h e t a r g e t g r o u p s is
o f c o u r s e h i g h e r t h a n th e a c c e p t a b i l i t y o f c o m p u l s o r y i n s t r u m e n t s .
I lo w e v e r , e n v iro n m e n ta l g ro u p s a re u s u a lly v e ry s c e p tic a l a b o u t
c o v e n a n t s b e c a u s e o f t h e ir la c k o f le g a l s a n c t io n s ( O p s c h o o r et a l.
1 9 9 4 ) ; t h e y c o n s i d e r t h e s e v o l u n t a r y a g r e e m e n t s to b e s e c o n d - b e s t
in stru m e n ts
o n ly ,
th o u g h
p referred
to
no
in te rv e n tio n
at
a ll.
I m p o r t a n t c o n d it io n s fo r th e s u c c e s s o f c o v e n a n t s c o n s is t o f tlic
l e v e l o f o r g a n i s a t i o n a n d ' d i s c i p l i n e w i t h i n th e i n d u s l r y - b r a n c h — to
a v o i d f r e e r i d i n g o f i n d i v i d u a l firi^ is ; a r e l a t i v e s t a b l e c o m p o s i t i o n
o f the b r a n c h — few e n trie s a n d e x its o f in d iv id u a l firm s ; a n d the
e ie d ib ilit y o f the re g u la to ry th re a t.
F in a lly , c o m m u n ic a t iv e in s t r u m e n t s s u c h as in fo rm a tio n o n c le a n
t e c h n o lo g ie s a n d a b a te m e n t t e c h n o lo g ie s , in te rn a l e n v ir o n m e n t a l
J6
l*(tiiniion C^nntriti m the South and K(*rfh
m anagem ent
sch em es vviihin firm s , a n d so f o r t h , can be v c r v
useful in c o m b i n a t i o n w ith o t h e r ( e c o n o m ic o r r e g u l a t o r y ) in stru merits.
E c o n o m ic in s tru m e n ts
E c o n o m ic in s tr u m e n ts p r o v id e e c o n o m ic in c e n tiv e s to e c o n o m ic
a cto rs
in d u c i n g
th e m
lo
b e h a v e in an e n v i r o n m e n t a l l y
m o re
a p p r o p r i a t e o r a c c e p ta b le w a y ( O p s c h o o r & T u r n e r 1 99 4). In a
system o f f x / I I u l i o n c h a r g e s .' the a d m in is t r a t o r levies the p o llu t e r
an a m o u n t o f m o n e y p e r unit o f p o llu t io n d is ch a rg ed . A s has
already been in d ic a te d , charges have been a dvocated by economists
b e c au s e, u n d e r specific c ircu m s tan c es , th e y o f f e r b o th static a m i
d y n a m ic e f f ic ie n c y . T h e f o r m e r is o f f e r e d because th e y a llo w firm s
f l f s i b i l i t y in a d j u s t in g th e ir b e h a v i o u r , thus a llo w in g t h e m to f in d
the m o s t cost e ff e c t i v e sniuiion.s. A n y i n d iv id u a l firm c o n f r o n t e d
w ith a p o l l u t i o n c h a rg e can d e c id e h o w m u c h p o llu t io n to a b a t e . Il
will t r a d c - o f f ilic costs o f p o llu t io n a b a t e m e n t in v e s tm e n ts w it h the
b en e fits o f p a y in g a lesser c h a rg e . T h e o p t i m a l level o f p o llu t io n
a b a t e m e n t f o r the f ir m is tha t level w h e r e the costs o f a b a t e m e n t o f
the last u n it o f p o llu t io n e q u a l th e u n il- lc v c l o f the c h a rg e . T h e r e ­
fore, firm s w it h l o w m a rg in a l a b a t e m e n t costs w ill a b a te r e la l iv c lv
m o re than firms w ith high m arg in al a b a lc m c n l costs. T h is guarantees
cost e ffe c tiv e n e s s in a b a t e m e n t , tha t i.s, f o r in d u s try as a w h o le a n y
level o f p o llu t io n a b a t e m e n t is a c h ie v e d by least costs.
C h a rg e s c a r r y a d y n a m ic in c e n tiv e effect to o . In c o n tra s t to
fixed r e g u l a t o r y s ta n d a rd s , th e y o f f e r a c o n t in u o u s in c e n tiv e foi
in d u s try to d e v e l o p and i m p l e m e n t m o r e cost e ffe c tiv e so lu tio n s .
I f technical progrc.ss causes c o n tro l costs to fall, an emission charge
w i l l in d u c e p o llu t e r s to lo w e r t h e ir em issio n levels because the
m a rg in a l c o n tro l.c o s ts will fall b e l o w the c h a rg e ra te . T h e p o llu t e r
will a d ju s t his em issions u n til the m a rg in a l c o n t r o l costs a re a g a in
equal to the charge rate. T h e im pact o f charge.s and o th e r eco n o m ic
in c en tive s on th e r a te and d ire c tio n o f i n n o v a t i o n is la rg e ly u n ­
k n o w n , t h o u g h ( O p s c h o o r & T u r n e r 1994).
W h e n the a d m i n i s t r a t o r docs no t have p e r fe c t k n o w le d g e o f the
c o n tro l cost f u n c tio n s o f the p o llu t in g firm s , th e e n v i r o n m e n t a l
effect o f a n y c h a rg e i.s not k n o w n in a d v a n c e . It has been suggested
that th e a d m i n i s t r a t o r adjusts th e c harge le vel via a t r i a l - a n d - c r r o r
a p p ro a c h
u n til the desired e n v ir o n m c n tt d o u t c o m e
Is a c h ie v e d
instrurrient C hoice tn Theory and Practice
(B a u m o l & O a t e s 1990). H o w e v e r , the ‘errors’ in the charge
settin g m ay p r o d u c e high co m p lia n c e c o sts becau se o f the huge
and at least partially irreversible in v e stm e n ts they induce (B o h m
& R ussell 1985, p. 410 ). A co m p licatin g factor is that the 'o p iim a r
charge le v e l can ch a n g e in tim e b e c a u se o f inflation, technical
progress and g row th (d ec lin e) o f the p o llu tin g scc io r (s).
T h e situ atio n w o r se n s if the location o f the source o f p o llu tio n
matters and if the relationship betw een em issions and environmental
d a m a g e is very non-linear. In th ese c a se s ch arges should be in d i­
vidually tailored to the various so u r ce s, and optim ality s e e m s very
difficult to achieve without full know ledge o f the sources' individual
c o s f fu n ction s ( B o h m & R ussell 1985).
Indu stry’s o p p o s it io n to charges is to a large exten t m otivated by
iheir distribu tion al c o n s e q u e n c e s . A n cfniiciit charge is levied on
every unit o f p o llu tio n . T h e re fo r e , e v e n if a firm cuts d ow n its
em issio n to an ‘o p t im a l’ level, it still pays charges for the non;jbated or residual e m issio n s. W hy sh o u ld this m o n e y be paid to
the a u th o rities after all? Is the state the o w n e r o f the en v iro n m en t?
M o r e o v e r , the q u e s tio n is what h a p p en s with th ese ‘transfer’ p;iym ents. Will th e s e transfers b e returned to industry (for e x a m p le in
the form o f a r ed u ctio n in w age c o s t s ), or will th ese transfers be
used for otlier purposes (e .g ., flow to the general budget)? Inclu.stry’s
o p p o sitio n to ch a rg es and p referen ce for regulatory ap p roaches
can also b e e x p la in e d by greater ren t-seek in g o p p ortu n ities o f the
latter app roach (V e rb ru g g en 1991). T h e s e is.sues will be pursued in
Section 2.3 .
T h e a d m in istra tiv e feasibility o f e fflu en t charges in term s o f
m o n ito rin g d o e s not fu ndam en tally differ from direct regu lation .
H o w e v e r , th e a d m in istr a tiv e fe a sib ility c o u ld be sig n ifica n tly
e n h a n ce d if th e discharge or em ission in q u estio n cimld be directly
related to the use o f s o m e input or the produ ction o f so m e ou tp u t.
For e x a m p le , in th e case o f a C O 2 red u ction policy , a charge can
be levied on carb on inputs rather than on its emi.ssions. In this
case, th e c h a r g e c o lle c tio n is rather e a sy becau.sc a c o n n e c tio n can
be esta b lish e d w ith existing tax m ech an ism s, A clear disadvan tage
o f this typ e o f ch argin g is ihaf^it d o e s not take into account the
possibility o f r ed u cin g e m ission s by m ea n s other than reducing the
am ount o f the charged input or output.
A n a ltern ative to charges (u ^ ich set prices) is the concept o f
tradable perm its (w hich set qu antities). A permit allows a firm a
I >i'ifrill III t b r S auf h and N o r t h
c e r t iii n n m o u n t <if p o l l u i i o n p e r l i m e p o r io t i. M i l k i n g p e r m i t s trinJa b l e m e a n s t lia t if a f ir m p o l l u t e s less t h a n a l l o w e d , it c an sell its
s u r p lu s p e r m i t to a n o t h e r fm m w h ie h w o u l d lik e to p o l l u t e m o r e
t h a n a l l o w e d b y its c u r r r n t p e r m i t . A n y iiK ii\i(.lu a l f ir m w il l t r a d e ­
o f f th e costs o f p o l l u t i o n a b a t c m c r i t in v e s tm e n ts w i t h t h e b e n e fits
o f s e llin g its s u r p lu s p e r m it s , C o n t r a r y to c h a rg e s , l l i e o v e r a l l le v e l
o f p o llu tio n
re d u c tio n
b e c a u s e o f this in s t r u m e n t
is k n o w n
in
a d v a n c e . T h e r e is no p r i o r k n o w l e d g e o f t h e p ric e o f th e p o l l u t i o n
p e r m i t , it is a u l o m a t i c t i i l y e s t a b li s h e d in tlie m a r k e t p la c e ( i f t n i d c
a c t u a l l y t a k e s p l a c e ) . T h e c o n c e p t o f t r a d t ib lc p e r m it s has b e e n
h a i l e d b y e c o n o m i s t s as an e f f e c t i v e a n d e f f ic ie n t i n s t r u m e n t f o r
e n v i r o n m e n t a l p o lic y .
1 l o w e v c r . s o m e c a v e a ts s h o u ld be m e n t i o n e d . A b ig t h r e a t to
;in v m a r k e t a b l e p e r m i t s c h e m e is m a r k e t th in n e s s . A n y p o t e n t i a l
a d v a n t a g e s o f m a r k e t a b l e p e r m i t .schemes s oon e v a p o r a t e if t h e r e
is l o o li t t l e t r a d e .
A
p o s s ib le re a s o n f o r lit t le t r a d e is s tr a te g ic
h e l u o ' i o u r o f f ir m s in an o lig o p o lis t i c m a r k e t . F ir m s m a y d e c id e
not
lo sell i h c i r r e d u n d a n t
sales m a r k e t )
p e r m i t s ( t o t h e i r c t i m p c t i t o r s in t h e
b e c a u s e o f s l r a t c g i e retisons:
lim itin g the m a r k e t
s h a r e o f t h e i r c o m p e t i t o r s . F m p i r i c a l rc s e are li has s h o w n th a t t h e
m a j o r c a u s e o f m a r k e t th in n e s s is o v e r - r e g u l a t i o n ( D u d c k & P a lm i s a n o Id g H ) . A u t h o r i t i e s a rc e a s ily p c r s u a t lc d to p lace a ll sorts o f
( w e l l - m c a n l ) r e s t r ic tio n s o n tradc.s. In s te a d <if 'b e t t e r ' t r a d e s , th e
e n d re s u lt i.s o f t e n th a t no t r a d e ta k e s p la c e at all.
Just as w it h c harg es, a m a r k e t a b l e p e r m it .scheme gets c o m p lic a t e d
i f t h e l o c a t io n o f a p o l l u t i n g s o u rc e m t illc r s . T o
d is a d v a n ta g e
o v e r c o m e this
it has b e e n s u g g e s te d to re s tric t tra d e s to s o u rc es
w i t h i n s p e c ific g e o g r a p h i c a l z o n e s , e . g . . a p a r t i c u l a r w a t e r s h e d .
T n i d e s b e t w e e n sou rc es in d i f f e r e n t z o n e s w o u l d n o t b e a l l o w e d .
T h i s s o l u t io n
in c re a s e s tlie d a n g e r o f m a r k e t
th in n e s s a n d th u s
p o t e n t i a l l y r e d u c e s th e e ff e c ti v e n e s s o f t h e .scheme.
The
d is t r i b u t io n ; ! !
d ep e n d on
c o n s e q u e n c e s o f :i p e r m i t
th e in ititil a ll o c a t i o n o f the p e r m it s .
tra d in g
schem e
P e r m i t s can be
g r a n t e d fo r fre e on the basi.s o f existing p o llu tio n ( 'g r a n d f a t h e r in g ')
or
th e y can
be a u c t i o n e d ,
w h e r e b y th e t i d m i n i s t r a t o r sells th e
p e r m i t s to t h e highe.st b id d e r s . E i t h e r w a y , th e d i s t r i b u t i o n a l c o n s c tp ie n c c s a r c c o n t r o v e r s i a l ,
r i i e d y n a m i c e f f ic ie n c y o f a p e r m i t t r a d in g .scheme, i . e . , th e
in c e n tiv e
to
d ev elo p
and
im p le m e n t
cost e ff e c tiv e s o lu tio n s
lo
r e d u c e p o l l u t i o n , d e p e n d s o n th e f u n c t i o n i n g o f th e m a r k e t f o r
im jrufU ^nt Chemv in 'I'ht'nn,' v n J
39
p e rm its . The in e e iu iv c is g r e jt e i if there is less iiiic e rt;i!m \ .ilio u i
the p rice ;i( w liic li llie rc tlu n d iiiii perm its can he so ld . A liijth lese l
t)f u n ce rtain ty on these p rices (hecause o f poor functioning m arkets
o r an u iip r c d ic ta h ic g o v e rn m e n t p o lic y j re d u c e s the d y n a m ic
in c e n tiv e .
T h e iid m in is lrtitiv c re q u ire m e n ts o f a trad a b le p e rm it schem e
;ire_h jg her thaii a eotnpartihle clitirgc or teguktlory schem e hecause,
in tid d ilio n to m o n ito rin g e m issio n s, the c o iilr o l tigency lia s tt)
re co rd co m p le te d trad e s as w e ll,
■
lic o iio m is ts have o ften qu estio n ed the e lfe c tiv e n o ss u ( .'nih.sidies
on clea n a lte rn a tiv e s b ecause although they m ay be e ffe ctiv e fo r a
single firtn , they do not give the right p rice signttis to in d u sit v as a
w h o le . T h e y m ay th e re fo re have o ve ra ll p e rve rse e n v iro n m e n ta l
e ffe cts b ecau se th ey d e cre a se average costs and m ay tliu.s lc ;id to a
h ig h e r p ro d u ctio n v o lu m e (B a u m o l & O ates 1990). ,\ n a d d itio n a l
d isa d v jin ia g o o f su b sid ie s is that they arc a b urden to the g e n e ral
b u d g et. A lth o u g h su b sid ie s tire so in e iitn cs p e rtn itic d u ndci the
v a rio u s in te rp re ta tio n s o f the P P P ( O E C D , E C ) , th ey a rc often
co n flic tin g w ith the le tte r an d the spirit o f this l^ rin cip lc. A ilis iin c tio n can be m ade b etw een Llircci o b jc c f sub sid ies oti the one h an d ,
and su b sid ie s fo r p u b lic p ro v isio n s ( e .g ., c o lle c tiv e w aste '.'.atcr
tre a tm e n t p la n ts) and su b sid ie s for research and d e velo p m en t
( R & .D ) on the other h iin d. In general, subsitlies for public pros isions
and R & D are less c o n iro v c rsitti tli;m o bject su b sitlie s. M o re o v e r,
(te m p o ra ry ) su b sid ie s cati p la y an im porttint ro le as tlic ‘ lu b ric a n ts '
o f e n v iro n m e n ta l p trlic y , h e lp in g firm s ad ju st to m o re s lriiig o n l
re g u la tio n s.
D e p o s U - r e fu / id s y s t e m s im p ly th a t'a p o tential p o llu te r is taxed
(d e p o s it) in ad van ce an d that this la.x is reb ate d (re fu n d e d ) if
ce rta in c o n d itio n s a rc m et, e .g ., p ro o f that a p ro d u ct is re tu rn e d to
a speciPicd place o r that a specified type u f damage has not o ccurred .
D e p o sil-re fu n d system s are often used to prevent litterin g (b o ttle s,
c a n s )_ a n d lo p re v e n t the u n c o n tro lle d d isp o sa l o f h tiz a id o u s
in a tc ria ls such as b a tte rie s . D cp o .sit-rcfu n d syste m s are iittra e tiv c
if it is v e ry d iffic u lt to m o n ito r dischargc.s o f p o llu tio n . F ro m the
g o v e rn m e n t’s po int o f v ie w , .it is an attra ctive o p tio n b ecau se it
re v e rse s the b u rd e n o f p ro o h O f co u rse , it re q u ire s that it is
ic e h iiic a lly fe asib le a iu l not lo o exp ensive to e sta b lish this p ro o f.
T h e g o ve rn m e n t can im p le m e n t its own d e p o s it-rc fu n d syste m s or
i( can ‘p e rsu a d e ’ in d u stry b ran ch e s to scl up th e ir o w n syste m s.
40
Piiltiilion (.o n /ro l in th e Sfuilh an d Nnrt-
A final e c o n o m ic instrum eni is //n/)/7;Vv legislation, requiring tin
polluter to c o m p e n s a te the environm ental dam age he c a u s e d , ami
thus providing a financial incentive for pollution prevention (cither
directly, or indirectly, through higher insurance p r e m iu m s). T he
effectiVOnc.ss o f liability legislation depentis on the t|ucstion wFictlier
it is p o s s ib le to esta b lish p r o o f o f a c a u s c - c ff c c t r e la tio n s h ip
b ^ w e e n en v ir o n m e n ta l d am ag e and the discharge o f a pollutant
from a sp ecific .source. E x am p les arc .soil pollution by hazardous
wa'stes and oil spills. Strict liability m ay force poten tial p o llu ters to
tak e the (p o te n tia l) env iro n m en ta l d a m age cost.s o f their actions
into a c co u n t, th ereby creating incentives for e fficien t levels o f
precau tion.
A g e n e r a l p r e c o n d itio n for the e ffe c t iv e n e s s o f e c o n o m ic
instrum en ts is the w cll-fu nctioning o f markets. T h e p r e se n c e of
s e v e r e disto rtion s in the market in which the instrum en ts arc to be
ap p lied m ay dim inish or nullify their e ffe cttv c n c ss. E x a m p le s of
such m arket im p erfections arc a limited access o f the target gro u p
to the capital m arket which p reven ts oth erw ise pro fitab le a b a te ­
m ent in v estm en ts; and the distortion o f price signals w hich may
drive a w e d g e b e tw e e n the agent w h o pays the c h arge and the
agent w h o in flu e n c e s (he am ou nt o f pollu tion (a p r o b le m k n o w n as
the principal agent p r o b le m ).'
Regulatory instruments
R e g u la to r y ( C A C ) instrum ents have been ex te n siv ely criticised by
e c o n o m is ts but arc n ev erth eless the most c o m m o n _ cn y iro n m c n ta l
instrum en ts across the w orld. S ection 2 .3 in vestig ates p o s s ib le
e x p la n a tio n s for this p h e n o m e n o n .
T h e d isa d v a n ta g es o f regulatory instrum ents arc sev e r a l. First,
th ey usually take little accou n t o f differen ces o f p o llu tio n control
c o sts b e t w e e n so u r c e s. S e c o n d , th ey usually a p p ly d iffe r e n t •
stand ard s to old and new industries. T hird, fixed stand ard s offer
n o incentive for dyn am ic efficiency. Producing less p o llu tio n than
a llo w e d in the lic e n c e offers no benefits to the p o llu ter. F ou rth, a
regulatory app roach directed tow ards individual s o u r c e s offers
little flexibility in the face o f e x o g e n o u s ch a n g e . A n y in crease in
the num ber o f regulated sources po.ses a threat to am bient cnvironmcntal quality. A fifth disadvantage, which they share with cfflucnlh ascd charge and tradable perm it s c h e m e s , is that th e y require
e x te n s iv e m o n ito rin g and control.
________________
41
There is little disagreement, however, that in certain specific
cases o f pollution there are no alternatives to direct regulation
(W R R 1992), namely:
• for activities with serious impacts on health (e.g., the use of
specific types of asbestos), a direct ban would be most
appropriate;
• for situations which have to be solved in a very short period of
time (days, weeks or months), direct regulation would be
most appropriate, or, in the absence nf a legal basis, voluntary
agreements;
• in situations where the non-attainment of environmental targets
would result in large risks or very uncertain situations (e .g .,
the storage of nuclear waste), direct regulation is preferred.
Moreover, the disadvanttiges Of a regulatory approach vis-a-vis
!i market based approach are smaller if the location o f the source
matters. The smaller the disadvantages, the more stringent are the
ambient environmental targets. If the targets are so strict tliat
every source should take every conceivable measure to reach the
ambient target, there will be little difference in the total cost of
regulatory and market based approaches,
Standards can be divided into performance standards (e .g .,
effluent standards) and design standards (e.g.. Best Available
Technology), From the point of view of cost effectiveness, jierformance standards are to be preferred over design standards
because they offer the firm greater flexibility in meeting the standard.
Design standards can only he efficient if direct or indirect monitor­
ing o f releases of pollulanis is unreliable, prohibitively expensive
or technically infeasible or if there is no doubt about the mo.st
efficient approach to meet a performance standard. An example of
such a design standard is the three-way catalytic converter in cars
which reduces NO,,, CO and VOC emissions, because it would be
infeasible to monitor exhaust emissions directly or indirectly.'’ On
the other hand, this example shows the relative inflexibility of a
regulatory standarti in the face hf exogenous change, as the ohligation to use catalytic converters cannot avoid an increase in total
emissions due to an increase in traffic intensity.
Fixed standards— performance or design— offer no incentive for
the continuous development and implementation of cost effective
solutions for pollution control. However, standards do not have to
42
t'litlilliiiii I .ii ii/ r t d
III
//’(■ S nitih
iiiul
iVrjr//'
he lixed. Staiulartls ean a d iie v e stmie am ount o f d yn a m ic cfficienc) il
tlic v a re p rogressively lig h te n e d aeenrdin g to som e specified tim e l.d 'le .
.Summary
T he e n v ir o n m e n t a l policy m aker lias a n u m b e r o f in s tru m e n ts at
his disposal. W e have dis tinguis hed;
1. C’o m n n in ic a t iv e m s t r u m e n ls :
in f o r m a t io n a m i e d u c a tio n ;
covenan ts: v o lu n t.rry agree m en ts.
2.
H e o iio m ic in stru m ents:
R A ' D .s u b sid ie s;
sulisitlies on
t le a n ’ allerruitives;
p o llu tio n charges; a levy p e r unit o f e m is s io n ;
p r o d iie l/in p u l charges: a levy on ;i p o llu t in g p ro d u c t o r
in p u t;
tra d a b le p e rm its ; a p o llu t e r w h o p o llu tes less ( m o r e ) than
his c u rre n t p e r m it ean sell ( b u y ) surplus p e r m its to ( f r o m )
o t h e r firms;
d eposit re fund;
lia b ility le gislation.
.3. D i r e c t re g u la tio n ( C A C ) ;
emission standards; specifying the a llo w a b l e emission p e r
t im e unit;
design standards: specifying process c h a ra cteristic s.
N o t e v e ry in s tru m e n t is e q u a lly suitable in e v e r y s itu a tio n . Ne.xt
w'c w ill pay clo.ser tiltc n tio n to the circum stances w h ic h d e t e r m in e
I h e re la t iv e .success o f the d iffe re n t types o f in s tru m e n ts .
«
Counter-indications of suitability
F r o m the a b o v e di.scussion it is clear that specific c ircum stances
d e c id e on the s u ita b ility o f ii p a r tic u la r typ e o f in s tr u m e n t, 'riie se
c ir c u m s t a n c e s
are
s o m e t im e s
culled
s itu a tio n -c h a ra c tc ris lic s
H o v c n b c rg et al. (1991) distinguish between three im p o rta n t classes
o f s itu a tio n -c h a ra c tc ris tic s ;
• character o f pollution;
• character o f the jiolhiiing processes;
• character of the target group and the m arket.
W ithin these classes o f situ ation-characterisiics there are several
a.spccts which affect the potential perform ance o f p o licy instru­
m en ts. B o v en b e rg ct al. indicate which in.struments are not. or
less, su ita b le in the pre.scnce o f specific .situation-charactcristies.
T h e y give counter-in dication s rather than prescriptions, f'or
e x a m p le , o n e aspect o( the character o f the target g r o u p is its
accessibility (which increases if the target group is better organised).
If the accessibility o f the target group is small, the instrum ent o f
agreem ents (covenants) is less suitable. The situation-characteristic
o f ‘a c ce ssib ility ’ provides a counter-indication o f suitability o f
c o v e n a n ts in this case.
A s p e c ts o f the pollution itself which arc o f im p ortance for the
c h o ic e o f instrum ents include: the severity (and irreversibility) o f
p ollu tion ; the relationship b e tw e en discharges and d a m a g e (u n ­
certain ty o f cause and effect; non-linearity; location m atters).
A.spects o f the polluting processes which are relevant arc: the
availability o f ‘c le a n ’ substitutes or the options to d e v e lo p such
.substitutes; the presence o f market im perfections which dim inish
the sen sitivity to price signals; the variation o f a b a tem en t costs
lie tw c en polluting sources; the com plexity o f the process; and the
leasibiiity (and costs) o f m on itoring p o l l u t i n g d i s c h a r g e s .
A s p e c t s o f the target group and the market which arc relevant
are: th e size and level o f organisation of the target group; the
m arket form (pure c o m p e titio n , m on o p o ly , o lig o p o ly ); and the
d y n a m ic s o f the market (entry and exit).
T h e m ain elem en ts o f the assessm ent o f the relationships
(B o v e n b e r g et al. 1991) b e tw e e n these situ atio n -ch aracterisiics
and the non-suitability o f various instrum ents arc pre.scntcd in
T a b ic 2 .1 . T h e tabic should be read as follows. T h e rows represent
various instrum ent types (c o v e n a n ts, R & D .subsidies, subsidies on
alternative products or p rocesses, em ission charges, e tc .). J'he
c o lu m n s represent the various fc le v a n i situation-charactcristies
(severity o f environmental dam age, non-linearity betw een discharge
and e ffe c t, e tc .). A less suitable com bination b e tw e en an in sliu ment and a situ ation-characteristic is marked with an X (the
Instrument
C o m p le x
p ro c e ss
P o or
measurability
o f emission
Little relation
betw een
produ ct! input
em ission
Covenant
R& D
su b sid ie s
X
Poor
accessibility
o f target
grou p
Little
com petition
D yn am ic
secto r (easy
entrance)
X
X
X
X
S u b s id ie s o n
a lte rn a tiv e
X
X
X ’
X
E m is s io n ch arg es
i
P ro d u c t/in p u t
T r a d a b l e p e r m it s ^ ' '
X
T r a d a b l e p e r m it s ^
X
X
D ir e c t re g u la tio n '
D i r e c t r e g u l a t i o n ’'
X
X
X
X ”
D c p o s il-rc fu n d
' c o u n t e r - i n d i c a t i o n s a r e m a r k e d w it h ‘X ’
' r e la t i v e h ig h d i s t r i b u t i v e e f f e c t s
' free d istrib u tio n o f in itia l p e r m it s
^ a u c t io n e d s a le o f in it ia l p e r m it s
e m is sio n sta n d a rd s
'' d e s i g n s t a n d a r d s
m ark et fo rm
* if l i a b i l i t y is d e f i n e d f o r a s p e c i f i c p r o d u c t
d c p o s i i - r e f u n d is u s u a l l y f o r a ( r e s t ) p r o d u c t
B o v e n b e r g c t a l.
\r
X
X
' c h a rg e le v e l s h o u ld t a k e a c c o u n t
1991.
«
X
X*
L ia b ility
So u rce:
X'
X
ch arg es
X"
T a b l e 2 .1
C o u n t e r- in d ic a t io n s o f In stru m en ts'
I n x i r u m t 't u
C iiv c n .in t
s u b s id ie s
Severe ilantage S tm -tin earity
Tim e
space Few subsiiiutesi
Market
ili'pem iem e
high costs
itnpcrfections
I n th n iiiKnts
Ukt'lY
titilikciv
In trv c \ (Onn.oti
in control costs
X
X
X
X
S u b s id ie s ©n
u U e n iu tiv e
E m is s io n c h a r g e s
X
X
X
X
X­
X
X
X
X­
X
X
X
X
X
X
tT o d iie i/in p u l
e lia r g e s
1 ra d a b le p e r m its
X
1 r a d a b le p e r m its'
I lalMlity
X
X
X­
X
X’
X
X
D ir ec t r e g u la tio n '
D ir ec t regulalit>iT
D e p o s it - r c l'u n d
X
X
X
X
X
X
X
__________________________
I'li/lUltrin Ciiiifrnl in the Sfiulh anJ N nrih
c u u n tc r-in d ic a tio n ). O b viou sly, these cou n ter-in d ica tion s sh o u ld
not be interpreted to o strictly. An ifistrutncnt cun lie m a d e m o re
su ita b le by a careful design which takes into account the s itu a t io n charactcristics.
^
Severity o f damage
If the e n v ir o n m e n ta l d a m age is very sev e r e and irreversible in the
short term, those instruments which offer little short-term certainty
o n the en v ir o n m e n ta l e ffe ct, i.e ., c o v cm in ts. su b sid ies, c h arges,
design standards, seem less suitable. In Table 2,1 these instruments
have b e e n m arked with an X to indicate that they m ay be less
a p p rop riate in ca ses o f sev ere dam age. T his d o cs not m e a n , h o w ­
e v e r , that incentive instrum ents (sub sid ies, charges) c a n n o t be
u se d in com bination with direct regulation. T h e y can stim u la te
d y n a m ic adjustm ents.
N on-linearity
In s o m e ca ses en viron m en ta l dam age can progressively rise if total
p o llu tio n e x c e e d s so m e threshold level. Instrum ents w hich directly
r eg u la te the qu antity o f pollu tion arc preferred in th e s e cases.
S u b s id ie s , ch a rg es, design standards and d e p o s it-r e fu n d instru­
m e n t s are co u n ter-in d icated .^ T ra d a b le p erm its a n d e m is s io n
stand ard s arc m o re appropriate, although it should be n o te d th at
next to e m issio n standards per sou rce, the n u m b er o f so u r ce s
sh o u ld b e rcguJated. T here i.s, in gen eral, no o b je c tio n to c o m b i­
na tio n s o f direct regulation and e c o n o m ic incentives.
T im e and space dependency
Jf lo ca tio n and tim e matter, e c o n o m ic instrum ents face im portant
d ifficu lties, as discus.sed earlier. T h ey have all b e e n c o u n t e r ­
in d ic a te d . If cn v ir o n m c n ia l d a m age can be relatively easily traced
back to a particular source. JiabiJity can he efficient. D irect r eg u la ­
tion can take tim e and space considerations into accou n t, alth ough
this puts a heavy information burden on the environmental authority.
It ifln ir u e n l C h o ice tn T h e o ry a n d Pme/iee
47
Few substitutes/high costs
If firms have few substitutes for dirty processes, or if they entail
high costs, every single instrument will meet fierce opposition.
However, because of the distributional consequences regulatory
instruments (and subsidies) will face less opposition than charges
and auctioned permits. Subsidies on alternatives have been counter­
indicated because they will be extremely costly to" the budget.
Market im perfections
■
As discussed, market imperfections reduce the suitability of eco­
nomic instruments. Market imperfections, in general, reduce the
demand-elasticity of dirty products and activities: they reduce the
target group’s sensitivity lo price-signals. One important market
imperfection is lack of knowledge. If a polluter is unaware of the
possibilities of environment-friendly alternatives, a charge will not
change his behaviour. Another market imperfection may be limited
access to capital. Even if an environmental investment would be
paying, limited access to capital may prevent the investment from
being made. Market imperfections can also be created by govern­
ment policies, e.g., the assistance of certain economic sectors for a
variety of reasons. The first-best remedy in the case of market
imperfections is to abolish them. If this is not possible, or not
desirable, direct regulation is a more appropriate approach in the
case of severe market imperfections. Even so, there is a real
danger that direct regulation will hamper the operation -of the
market even more.
Innovations likely/unlikely
If it may be expected that environment-saving innovations will be
developed in time, subsidies on alternatives and design standards
may be very counter-productive. If innovations are unlikely, R&D
subsidies arc Ic.ss appropriate.
Large variation in control eosts
Such variation across sources usually makes direct regulations very
inefficient. Large variation in control co.sts is the condition for the
_____________________________________P'tHutiou G m lntt rn the South and Houh
efficiency of economic instrumciUs. Tiicrcfore, direct regulution
has been counter-indicated.
Complex process
I'he information requirements of authorities to target subsidies to
complex industrial processes arc usually too high. In this case,
design standards can be disa.slrous. Environmental authorities
.should not directly interfere with complex industrial processes
because they will, as a rule, lack the required knowledge. Instru­
ments which require less detailed knowledge of the process (per­
mits, charges, liability) arc more appropriate.
Poor measurability o f em issions
If it is not feasible or prohibitively expensive to monitor emissions,
any instrument which requires monitoring is less suitable: i.e.,
emi.ssion charges, tradable permit schemes, emission standards.
Product/input charges, design .standards, liability, and dcposilrcfund schemes offer better perspectives. The compliance of .in
industry with a voluntary agreement is difficult to monitor with
poor measurability of emissions. Firms within an industry may also
have difficulties in checking individual compliance among them­
selves. However, it is possible that approximate indicators can lie
used to check compliance in a covenant.
Little relation between product/input and em ission
Jf there is no compulsory relationship between product/input and
emissions, any instrument addressing product/inputs will be less
effective. Charges on products/inputs and deposit-refund schcnu s
have been counter-indicated. The emissions themselves should he
addressed.
P oor accessibility o f target group
Poor accessibility of the target group reduces the suitability of
agreements and R&D subsidies. If the target group is very large
and not very accessible, it will also be difficult to use emission
standards since the monitoring costs may well become very high.
^
In our view, the same djfficully applies lo the use of emission
charges and tradable permits (in Bovcnberg ct al. charges and
tradable permits were not counter-indicated).
Little com petition
The market form is important for the design of economic instru­
ments. In monopolistic markets, charges may actually increase
market distortions. Marketable permit schemes may suffer from
strategic behaviour and/or market thinness.
Dynamic sector (easy entrance)
In a highly dynamic sector, both agreements with branch organ­
isations and source-specific direct regulation are less suitable. The
first is less suitable because of the free-rider phenomenon, the
second because of the fact that source-specific direct regulation is
not flexible in the face of exogenous change. Emission standards
per source will not control the total pollution load to the envjronment if the number of sources grows significantly. Tradable permits
which put a cap on total pollution seem to be the preferable
instrument in this situation.
Private versus public enforcem ent
In most countries the responsibility for environmental regulation
and control has been vested almost exclusively in public agencies.
With the number and complexity of environmental ri.sks growing,
it i.s increasingly realised that these agencies face limits with regard
to their capabilities. For this reason, recent research has focused
on the complementarity and substitutability of private and public
action in the field of environmental regulation and control (Tietenberg 1992b; WRR 1992). The role of the court system in pollution
control has received considerable attention, especially since liability
law has been forwarded as a major instrument in two US environ­
mental Acts." Liability law can be an efficient instrument in some
cases if it is not too difficult (o cstalilish proof of a causc-effecl
relationship between environmental damage and the discharge of
a pollutant from a specific source. Examples are soil pollution by
hazardous wastes and oil spills. Strict liability may force potential
_______________________________________ Ptiliulititi Omfrot in the South and North
p o llu te r s to take the (p oten tia l) en viron m en tal d a m a g e c o sts o f
th eir actions into a ccou n t, thereby creating incentives for e fficien t
le v e ls o f precaution (T ie tc n b c r g 1992h). H o w e v er , m uch d e p e n d s
o n the actual charactoristic.s o f th cjiiib ility I;tw,
A n o t h e r inn ovation which may reduce the burden o f p u blic
a g e n c ie s is the oblig a tion o f corporations to regularly p repare and
publish en v iro n m en ta l ac co u n ts, in the sam e vein as th ey are
fo r c e d to prepare and publish annual financial accou n ts. A ‘g r e e n ’
im a g e is b e c o m in g increasingly important for c o m p a n ie s servicin g
th e c o n su m e r m arket. V oluntary ‘g r e e n ’ or ‘c c o ’ la b e ls c o u ld be
issucti o n the co n d ition o f published and approved e n v ir o n m e n ta l
a c c o u n ts .
Tlic Dutch Scientific Council o f G overnm ent Policy (W R R 1992)
has system atically distin guished the o p tio n s o f gt>vcrnmcnt to
in flu e n c e the b eh av iou r o f e c o n o m ic agents with respect lo the
e n v ir o n m e n t, W c have already discussed the distinction b e tw e e n
c o m m u n ic a tiv e instrum ents, e c o n o m ic in.strumcnts, and direct
regulation (C A C ). In more general terms, W R R calls these instru­
m e n ts persu asion , transaction and c o er c io n . A se c o n d d im en sio n
is fo rm ed hy the capacity in which t h c ’g o v c rn m c n t acts: in the
d esig n and e x ec u tio n o f public law , in the design o f rules o f private
law , and as a ‘n o r m a l’ participant in societal interactions. T h e final
role o f g o v ern m en t is as a provider o f infrastuctural and c o m p le ­
m e n ta r y facilities which are m eant to broaden the range o f b e h a v ­
ioural alternatives o f e c o n o m ic agents.
T h e different o p tio n s and roles o f g o v ern m en t are su m m a r ise d
in T a b le 2.2.
2.3 T H E CH O IC E O F E N V IR O N M E N T A L POLICY
IN STR U M E N TS IN PRACTICE
In the preceding section, we have identified a number o f situ a tio n characteristics w hich contribute to , or reduce the app licability and
feasibility o f specific policy instrum ents. It can be c o n c lu d e d that
in th eo ry there arc m any instances w here the use o f e c o n o m ic
insfrurncnts s h o u ld be preferred to direct regulation. T h e q u estio n
then naturally arises: why is it that en v iro n m en ta l p o licy m ak ers
th ro u g h o u t the w orld, in the va,st m ajority o f cases, o p t for a C A C
app roach tow ards pollution ? T o find s o m e possible e x p la n a tio n s
for this p h e n o m e n o n , it m ay be useful to h av e a closer lo o k at the
In s/ru m e n t C hoice ;n T heory j n J Practice
51
Table 2.2
Govenunenfs Options to Innuence the Behaviour of Economic Agents
with respect to the Environment
coercion
public law
private law
participant
direct regulation
transaction
charges,
subsidic.s to
poilulcrs
persuasion
environmental
accounting,
environmental
labelling,
subsidies to
environment
organisations
contraot.s,
liability law •
gentleman’s
agreements,
information.
education
Source; W RR 1992.
specific interests o f the various stakeholders involved in the process
o f environmental policy making: the authorities, the polluting
firms, environmental pressure groups, trade unions and consum er
organisations.
The p o licy m akers and administrators are, supposedly, interested
in achieving quick and predictable results in terms o f environmental
improvem ent. It is often assumed that a C A C type of policy
matches this goal best, as it implies enforceable targets. H ow ever,
in practice it often appears to be hard to enforce standards, bans
and obligations effectively. One could even argue that econom ic
instruments (especially charges and taxes) have more o f a built-in
incentive foF effective enforcement because a governm ent which
does not enforce them loses m oney. A lso , in fiscal affairs the
principle o f ' ’equal treatment o f equal cases' seem s to be more
established than in environmental affairs. In other words: it seem s
to be less acceptable to prosecute one tax evader and spare the
other, than to treat two offenders o f environmental standards
differently. N evertheless, environmental policy makers often seem
to be convinced o f the superiority o f direct regulation in terms o f
effectiveness.
• Another reason why policy makers prefer direct regulation might
be that they are afraid o f having less grip on polluters if they would
££_____
PoUtition CoHtrol iit (he South and hiftrth
apply ch a rg es in.stcad ol standards (O p sc lio o r & T urner 1994).
M any au th o rs also m ention ‘bureaucratic inertia’ as a cause; the
fact that adm inistrators arc more familiar with rcgulatt)ry than
with fiscal m e a su r es and procedures. H a n ley ct al. (1 9 9 0 ) add to
this Ihe fact that v e sted interests arc involved: the C A C approach
creates m o re jo b s and influence for adm inistrators than a llow in g
the m arket to perform so m e o f the rcguiation. T h e y a lso m en tion
the relatively w ea k inlluence o f e c o n o m is ts on the form a tio n o f
environmental policy. In line with this, environmental administrators
arc afraid,.to lo se their autonom y if e c o n o m ic in stru m en ts arc
being ap p lied . T a x e s and charges generally im ply the in v o lv em en t
o f the finance departm ent, whereas direct rcguiation is the primary
or e v e n sole responsibility of the en viron m en tal d e p a r tm e n t.’’ On
the other hand, the finance administrators arc often quite reluctant
to introd uce e n v iro n m en tal taxes and charges b e c a u se th ey arc
m ainly in ter e sted in a stable revenue and a sim ple tax b a s e , tw o
features w hich e ffe ctiv e pollution taxes will not display principally.
The individual polluters' most preferred instrument is, obviously,
the subsiay.“ l n ' m o s t industrialised co u n trie s, h o w e v e r , industry
has recon ciled it.self to the PPP whieh im plies that su b sid ies for
p o llu tio n red uction arc not allow ed in principle. P rob ab ly, the
‘secdntl b e s t ’ instrum ent for industry is the volun tary a g r e e m e n t,
pro vid ed it can be ascertained that no ‘ou tsid ers’ tak e a d va n ta ge
by c ircu m v en tin g the provisions o f the a greem en t.
W h e n it c o m e s to the choice b e tw e e n direct rcgu iation and
e c o n o m ic in stru m en ts, both industrial organisations and individual
enterprises arc g en erally in favour o f direct r egu la tio n . Several
reasons can be identified for this.
B u c h a n a n & T u llo c k (19 75 ) have s h o w n that u n d e r certain
co n d itio n s regulation is less costly to the firm than the p o llu tio n
tax alternative. A lth o u g h their analysis applies only to a special
ca se , it is in d eed Iruc that the burden o f e n v ir o n m e n ta l taxes,
despite the efficiency advantage for sc^cicty at large, m ay be heavier
for the p o llu ter than the direct regulatiiin with e n v ir o n m e n ta lly
e q u iv a len t e f f e c t s .’" In principle, the r ev en u es o f a p o llu tio n tax
can be returned to the polluters (on a basis w hich sh ou ld be
in d ep en d e n t from the am ou nt o f p o llu tion ), but in actual practice
the m oney m ostly flows to the (general or cnrironm cntal) govern­
m ent budget. T h e r e fo r e , it is understandable that industry is not in
favour o f the tax alternaiivc.
I r t it r u m t r t f C h o ic e tn T h e o ry a n ti P ru a ic c
53
A second set of reasons for industry to be in favour of regulation
can be lumped together as ‘rent seeking’ (Verbruggen 1991), Direct
regulation can provide industry with several kinds of advantages
and market protection. This is evident in cases where 'newcomers'
have to meet more stringent requirements than established firms."
Furthermore, standards are often formulated in such a way that
they can only be met by a specific technology, thus favouring the
supplier of that technology. Indeed, one can observe many iii.stances
o f producers trying to obtain the status of legal standard for their
‘016311) product or process. Generally speaking, one could say that
regulation in general (and also environmental regulation) may
serve protectionist interests in various ways. Economic instruments
are more transparent and less vulnerable for serving protectionist
interests, and may thus have a more direct influence on the industry’s
international competitiveness (Verbruggen 1993).
'Third, standards arc more susceptible lo^bargainmg^nd negoti­
ations than charges and taxes. In many countries, the essentials of
a l a x (including the rate) have to be laid down in the law whereas
Standards often leave much to the discretion of the environmental
adrninistrator. Industry can try to use their influence and get more
lenient standards by showing that the proposed standards are
technically or economically not feasible, TTiis can be done both at
the leVel o f the individual firm and by industrial organisations.
On the o ther hairdrin case of a pollutijjn tax the industrial lobbies
can only try to influence the political process leading to fiscal
legislation. Once the tax laivJs.. in .force, they can only choose
b&ween paying or evading the tax (or bribing the tax officials, if
their ethic.s permit them to do so),
Enyironm eitlalpressure groups, presumably acting on behalf of
the (potential) victims of^pollution, are traditionally opposed to
replacing direct regulation by fiscal insirjiments. They dislike the
idea of ‘selling’ the environment to the highest bidder (thereby
forgetting that in a system of standards, the polluters arc granted
free use of Ihc environment). They somehow believe that (he right
to poITute'shouId not be for gale because the value of the environ­
ment cannot be expressed ih money terms. In recent years, how­
ever, the attitude of environmentalists has shifted more in favour
of pollution charges and taxes, although economic instruments are
still not se^n as ^n alternative, but more as a complement to direct
regulation. Many ‘green’ political parties and organisations have
54
P o llu tin n Q iiilrr il in th e S tn i/h a n d N o r th
ad vocated a radical tax reform, shifting the tax burden from labour
to polluting products (rather than emissions).
'
Finally, the citizens also play other roles on the environmental
policy stage. T h e organisations which represent them in these roles
(for instance, trade unions and con su m er orgunisadons) arc gen er­
ally not in favour o f any charges or taxes which decrease their
purchasing p ow er or lead to higher prices o f con,sumer products.
O n the "other hand, in m any countric.s these organisations tend to
be increasingly prepared to make sacrifices and m oderate their
demand.s in exchange for concrete environmental policy m easures.
W h en it c o m e s to the choice between instruments, consum ers will
probably be more op posed against product charges (with clear and
direct effects on product prices) than against measures which
initially hit the producers only (such as direct regulation or emission
charges).
W here e c o n o m ic instrum ents/lave been introduced in practice,
the main reason for doing so was generally the need for revenues
and not their efficiency advantage with respect to direct regulation.
M ost o f Ihe existing charges and taxes were introduced in order to
finance certain collective environmental facilities (O pschoor &
V os 1989). In so m e cases, these financially motivated charges have
had a clear regulating side effect, by stimulating polluting firms to
save costs by carrying out pollution control activities them selves.
Th e D u tch water pollution fee is a well-known example (Bressers
1988).
A n o th e r practical reason for introducing econom ic instruments
is their flexibility. In the United States, marketable permits have
offered a solution for the problem that in the case of fixed standards
no expansion o f production is possible in the so-called ‘n o n ­
attainment areas’. Under a marketable permit system, the producer
can obtain the right to increase emissions (caused by an increase in
production) by buying excess eimssion rights from other firms.
M ost o f the existing econom ic instruments are being used in
addition to C A C types o f instruments (Opschoor & Vos 1989). In
s o m e ca.scs, how ever, they came into being as a substitute for
ciii-ccr regulnrion, especia lly when a Standard o r an outright ban
was d e e m e d , unfeasible by the environmental authorities. M any
E U countries have, for instance, stimulated the use o f ‘cle a n ’ cars
and lead-free petrol by m eans o f tax advantages because E U
I regulations did not allow a ban on ‘dirty’ alternatives.
Thus, it can De concluded that several reasons can be found for
the fact that the role o f economic insiruments in environmental
policy is still relatively modest. Wc assume that many of these
reasons lie within the area of the interests of major stakeholders
invo/ved; policy makers, administrators and firms. Nevcrtlieless,
many experts fore.sec a larger role for market based instruments in
future environmental policy, Hahn (1989) mentions three factors
which stimulate their application;
• the increase in marginal abatement costs as environmental
standards are tightened;
• the experience gained in implementing economic instruments;
• the decrease in monitoring costs.
O ne could add to this the fact that economic instruments have a
certain appeal to free-market supporters and seem to reduce the
need for regulation. Also, the need for tax reforms (o r additional
tax income) may lead in some countries to increased attention for
environmental charges and taxes, as has been the case in Sweden
(a shift from direct to indirect taxes). Finally, for some pressing
environmental problems there seems to be no feasible alternative
to economic instruments. This is for instance the case with global
warming (partly caused by C O 2 emissions). Curtailing energy use
by means of direct regulation (rationing?) seems to be too rigid,
while trying to do so by communicative means has proven to yield
insufficient results. Therefore, economic instruments (charges or
tradable rights) remain as an option.
2.4 CONCLUSIONS AND ANALYTICAL FRAMEW ORK FOR
T H E REST O F THIS STUDY
Direct regulation (CAC) has been and is Ihe most important
instrument in environmental policy across the world. Economists
have often advocated a wider use of economic incentives to make
pollution control more cost effective. It has also been realised that
the effectiveness of direct regulation may be threatened by enforce­
ment problems in the face of the ever-increasing num ber and
complexity of environmental risks. Thi.s has led to a search for
possibilities to reduce the burden of monitoring and control by
56
I’lillnlKtft (jn ilr n l nr th e Srm th artei N or/h
public a g e n c ie s , for e x a m p le , through the obliga tio n o f e n v ir o n ­
mental a c c o u n tin g or through liability law.
'rhore can be n o general statem ent about the desirability o f any
single type o f instrum ent in cnvirortmcntal policy. S e c tio n 2 .2 ha.s
con sid ered m a n y practical com plications influencing the cho ice o f
instrum ents in specific situations in a particular cou n try. T h e situ­
ation can differ with respect to three different a spects. T h e first is
the environm ental problem; the severity of the da m a ge, the relation­
ship betw een discharges and damage, and whether location mtittcrs.
T h e .second is the character o f the polluting products and p ro cesses
and their alternatives; the availability and costs o f clean substitutes,
the c a se o f m on itoring discharges, the variation o f a b a tem en t costs
b e tw e en so u rces. T h e third aspect is the character o f the market:
market fo m i, market imperfections, (he size and level o f organisation
o f the target group. Section 2 .2 provided us w ith a prelim inary
framework to assess the suitability of various instruments in specific
circum stances.
In this stu d y , the perfi’rmancc o f pollution control instrum ents
in different cou n tries is com pared. E ach country has its ow n
value ju d gem en ts regarding the acceptability o f certain instnimcnts
and their (distributional) c o n se q u e n c e s. A n im portant difference
m ay lie in the organisation, c o m p e te n c e and cap a b ilities o f public
pollution control a gen cies, on national, state and local levels. O n e
should also c o n sid e r the present Judicial sy stem for a ssessin g its
poten tial role in c o m p le m e n tin g public e n v ir o n m e n ta l policies.
Finally, o n e sh o u ld have an o p e n ey e for p o ssib le in n o v a tio n s in
e n fo r c em e n t and t h e j o l c o ^ N Q D s and local c o m m u n itie s therein.
W e , th e r e fo r e , identify the institutional, co u n lr y -sp e c ific eoilt'ext
as a fourth a sp ect which can influence the c h o ic e o f instrum ents.
K e ep in g th ese differences and practical c o m p lic a tio n s in m ind,
there .seems little ob jectio n in stating that in the .search for an
effective and efficient set o f environm ental policy instrum en ts o n e
should alw ays try to design a system ‘w herein the self-in terest o f
the individuals will cause the emitters to control e fficien tly , the
recipients to s e e k and e n jo y efficient environm ental quality, and
the ag en cy p e r so n n e l to be rewarded for helping p r o d u ce it’
(Dow'ning 1984).
This b o o k e n d ea v o u rs to evaluate the suitability o f the ab o ve
framework for a typically non-western e con om y and tries to expand
the fram ew ork with typically country-(and d e v e lo p m e n t ) specific
Intlrum m t Choice in Theory and Practice
57
situation-characteristics. In doing so, this study tries to answer the
following questions:
• Can a more extensive use of econom ic instruments contribute
to a more effective and efficient environmental policy in both
countries, given their respective situation-characteristics?
• T o what extent are differences in pollution control objectives
and instruments in India and the Netherlands justified by
differences in econom ic and other conditions?
T o deal with these questions, it is necessary to have adequate
inform alion on the environmental policy and its context in India
and the Netherlands. The purpose o f Part II o f this book is to
provide this information.
Notes
1. A s has been m entioned already in Section 1.2. the idea o f a tax lo internalise
cxtcrnalilies originated from A .C . Pigou in )iis Econom ics o f W elfare (1920).
T a x e s o r charges for this purpose are often called Pigoviau taxes, after their
inventor. T he fact that taxes offer a lower-cost m ethod o f achieving a given
sta n d a rd than C A C was formalised by Baum oi & O ates (1971). T h e idea of
trad ab le pollution perm its was introduced by J .H . Dales (1968).
2. Subsidies usually introduce such distortions. T he negative e n v iro n m e n ta l c o n ­
sequ en ces will be discussed later.
3. F o r an extensive discussion on the interplay betw een environ m en tal policy
instrum ents and econom ic policy, see B o ve n b e rg et al. 1991.
4. T h e following discussion refers to a system of charges which has the p rim ary
ob jective of reducing emissions (so-called incentive charges). A s w c will see in
Section 2.3, in practice the main objective of pollution charges is usually to
raise revenues. R ates arc often loo low to provide any incentive effect.
5. T his pro b le m is manifest in the case of p ro tec te d rents in the residential sector.
A lth o u g h it might be profllnble for both lan dlord and tenant to b e tte r insulate
th e house to save energ y, the incentive o n th e part o f the landlord i.s lacking if
he is unable to pass on the insulation costs to the tenant because o f the
p ro te c te d rent.
6. ft can n o t be based o n fuel use because the emissions arc d e p e n d e n t on the
actual com bustion process.
7. T h e disadvantagc.s o f charges can be mitigated if they are com tiincd with o th e r
m easures which en su re compliance with the desired s ta n d a rd , e .g ., a p ro h ib i­
tively high charge rale for pollution levels exceeding this sta n d a rd , o r a re ba te
schem e for firms which achieve abatem ent beyond this level.
8. T h e C om prehensive E nv iron m ental R esp on se, C o m pe nsa tio n an d Liability
A ct of 1980, a n d the Oil Pollution Liability A ct of 1990,
58
I’ol/iifroft Cnitlrfd in the South and North
y
ITom (his point ol view, cnvirontnLMital adm inistnilors could be expected lo
prefer, within the area o f econom ic instnim ents, m arketable fjcrmits to taxes
or charges.
10 I veil if the lax option leads to lower costs for industry than direct regulation, it
is s o m e tim e s argued that industry prefers regulation because its costs arc less
‘visible’. In any ease, the costs o f regulation do not increase Ihc tax burden
figures w h ereas environmental taxes and charges generally do so.
1 1. C'airncross (1991. p. 239) cites several exam ples o f such ‘dirty protectionism '.
12. Clearly, if an individual firm succeeds in obtaining less stringent environm ental
dem an d s than its com petitor, this again creates an artificial ‘rent*.
Blueprint for a
Sustainable Economy
David Pearce
Edward Barbier
EIAIRITIHISCIAIN
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Measuring Sustainable
Development; Economic
Approaches
Introduction
c h a p t e r 2 in tro d u c e d the c o n c e p t o f s u s ta in a b le d e v e lo p m e n t a n d
sh o w e d th at it can be interpreted in vario u s w ays. N o n e th e le ss, a c o n s is ­
te n t d e fin itio n ,
first su g g e ste d
in
B lu e p rin t
I,
is
th at
s u s ta in a b le
d e v e lo p m e n t is ab o u t in crea sin g th e p er ca p ita level o f w ell-b ein g o ver
tim e. H o w th at w ell-being is m e a su re d is o p e n to d e b a te , but w e o ffer
the further su g g estio n here th at th e fo cu s sh o u ld be on the c o n d itio n s
for a c h ie v in g su s ta in a b le d e v e lo p m e n t, a n d th at th e s e c o n d itio n s are
not likely to ch a n g e m uch h o w ever su sta in a b le d e ve lo p m e n t is d efin ed ,
In all c a s e s , w hat m.atters is the c a p a c ity of co m in g g e n e ratio n s to g e n e r­
a te w e ll-b e in g from the re s o u rc e s th a t we leave them . It is hard to s e e
how th o s e re s o u rc e s will differ m uch in nature reg ard less of h o w su s ta in ­
a b le d e v e lo p m e n t is defined. O f c o u rse , it is o p e n to a n y o n e to d e fin e
s u s ta in a b le d e v e lo p m e n t. In d ee d , th is p ro b a b ly a c c o u n ts for th e huge
lite ra tu re o n th e su b je c t. We argue th at o u r own a p p ro a c h is in tern ally
c o n s is t e n t - th a t is we h a v e a th e o ry o f s u s ta in a b le d e v e lo p m e n t .
C h a p te r 2 sh o w e d how this th eo ry revolved round the n o tio n s o f differ­
en t kin d s o f cap ita l and technology. A rm ed with th ese c o n c e p ts , w e n ow
sh o w th a t it is p o ssib le to m e a su re su sta in a b le d e ve lo p m e n t. Pro b ab ly
th e m o s t im p o rta n t featu re o f a n y m e a s u re s h o u ld be its a b ility to
identify w h en an e co n o m y (a co rp o ra tio n , a city, a n e c o n o m ic se cto r, a
Box 4.1 Environmental Indicators and
Sustainability Indicators
Since B lu e p r in t 1 w as published in 1 9 8 9 vast efforts have been devoted to
devetoping indicators of sustainabfe davefopment, or so-cal(ed susfainabifity
indicators. In reality, the great maiority of these indicators are not indicators of
sustainability, but environmental indicators w hich show trends in the environ­
ment and, sometimes, in social and economic conditions. Such indicators are
often very valuable but they do not constitute measures of whether an economy
is on or off a sustainable development path. For that to be the case they would
first have to be rooted in some theoretical construct of what sustainable devel­
opment is, and, second, would have lo have some origin that is a point on Ihe
scale below which the economy is declared unsustainable, and above w hich it
is sustainable. Very few of the environmental indicators so far developed meet
these tests,
A good example is the set of indicators produced for (he UK by an inter­
departmental working group of UK m inistries (Department of the Environment,
1 9 9 6 ). Some 21 indicators are produced, beginning with economic indicators,
sectoral trends, changes in natural resource endowm ents an d changes in
environmental quality. For example, sustainable development involves produc­
ing a healthy economy, so the indicator chosen is GDP per head. To capture a
little of the demands that the economy places on the environment, it is noted
that the structure of the economy has moved aw ay from heavy industry towards
lighter industry and services. So, the structural composition of G D P is also
shown. Other economic indicators include savings ratios, consumers expendi­
ture. the rate of inflation, employment and government borrowing. But by
them selves, or even together, these indicators tell us little or nothing about
future sustainability.
Just as troublesome are the sectoral indicators. Sustainable development
requires an effective transport system but the challenge is to bring it into
balance with its effects on the quality of life. The indicators chosen are passen­
ger m iles, number of short journeys, the cost of travelling (but excluding all
social costs) and the amount of freight traffic. To find if these changes in trans­
port use have affected the quality of life one would expect to see indicators of
the quality of life, for example the number of households exposed to traffic
noise. There is no indicator of noise nuisance. But there are indicators of air
pollution from freight and passenger traffic. Even here, however, they show
emissions rather than population exposure lo air pollution.
One other example is expenditure on environmental pollution control. But
this could go up because the environment is getting worse, or because it is
already very clean and the (marginal) cost of making it cleaner still is very high.
In the first case, it is a response to a bad state of affairs, and in the second case
to a good state of affairs. Littie can be inferred fmni such indicators.
The examples illustrate the problems of trying to use partial indicators on
their own to measure an aggregate concept like sustainable development, if air
pollution emissions go up, we can perhaps say that, on this one indicator, we
are getting less sustainable or increasingly unsustainable. But if other emissions
go down what would we then say? The information contained in the indicators
data is immensely valuable, and some of it could be used to help construct a
proper sustainability indicator. But it does not of itself tell us anything about
sustainability. Much of the problem arises from not having any theory of
sustainability, so that available data determine what is selected.
---------------------------------------------------------------------------------------------------------------------
86
B lu e p r in l [o r a S u s la in a b ic E co n o m y
nation, the world as a wliole) is on or o ff a sustainable developm ent
path. This important feature helps distinguish true sustainability indica­
tors from Che vast number of indicators which have evolved and which
purport to be about sustainability, but which are not (Box 4.1).
Taking the theory of Chapter 3. this chapter explores various ways of
constructing economic indicators of sustainable development, The three
indicators chosen follow automatically from the discussion in Chapter 3:
•
•
•
Wealth Chapter 3 suggested that an economy with rising stocks of
capital assets was priim fade likely to be more sustainable than one
with constant or declining levels o f assets. By placing a money value
on capital assets we can aggregate them to produce a measure of
the stock o f w-ealth, comprising man-made capital, human capital
and environm ental capital. Social capital presents another
challenge, as wc shall sec;
Green national product Chapter 2 noted that one o f the driving forces
for measuring environmental assets in monetary terms was the
construction o f a revised GNP measure. By estimating the deprecia­
tion on different types o f assets, the estimates can be deducted
from GNP to secure a modified 'green' GNP;
Genuine savinos We introduce a variant of the green GNP measure
which we term genuine savings. As we shall see, this has the advan­
tage that it has a point of origin below which economies can be said
to be unsustainable and above which they are sustainable.
Measuring Wealth
Chapter 3 argued that an economy was potentially on a path of sustain­
able development if its stocks of capital assets were rising over time.
Since population could well be rising at the same time, a better indicator
of sustainability is that the per capita stocks of assets should be rising
over time. The indicator, then, is:
*
W = (10)T + Kn + Kfi)/POP
where K/ii refers to man-made capital. K;i to natural capital, Kft to human
capital and POP to population. W is overall wealth.
The only available measures o f overall wealth come from work at the
World Bank (Kunte et al, 1998). Table 4.i shows the results for selected
countries.
Table 4 .1 reveals some surprises. The traditional history o f economic
growth theory has tended to suggest that a nation's wealth is very much
dominated by its stock of man-made capital assets, such as roads and
Table 4.1 E5//HW/fi of Overal! Weahf} jorSch'clcd Coinitru''-. US$D00/C(ip;7d
C o u n try
Tbta/ W ealth
US$000
Haiti
In dia
Benin
China
Egypt
Peru
Indonesia
South Africa
Thailand
Malaysia
Saudi Arabia
UK
US
13
20
25
37
52
59
60
83
117
137
171
265
401
% d u e to Kh
% d u e to Hn
% d u e to K m
76
70
76
77
64
67
75
75
79
73
40
79
77
8
/
8
7
5
8
12
5
6
9
42
2
4
16
22
16
15
31
25
13
20
14
18
18
19
19
S o u rce : Kunte et al, 1998
machinery. Yet the wealth data suygesi that this type o f capital accounts
for only 10-30 per cent of overall wealth. Second, natural capital appears
to be relatively unim portant except for those nations with significant
energy reserves (for example Saudi Arabia and Indonesia). Third, the role
played by human capital is dominant at about 70 -80 per cent for most
countries. In part some o f these findings may reflect the way in which
the estimates are derived (Box 4.2). But, otherwise, they tend to be
consistent with the way that modern theories of economic growth jtave
developed, with a focus on skills, technology and knowledge. The dispar­
ities in wealth tend to mirror those for income the US has 30 times as
much wealth per capita than Haiti, for example.
Can these estimates be used to measure sustainability? if the
estimates are repealed for different years, and if the coverage is
extended, then the answer is probably yes. As they stand, they tell us
little about sustainability. Nor can we say tfiat wealthier countries are
more sustainable than less wealtliy ones, although there are some
reasons for thinking this might be the case. As an example, a country
with more assets can withstaud shocks and stresses better than one
with few assets, so long as the stres.s or shcqk does not affect all assets
at once, At the moment, the estimates are exploratory, providing a stimu­
lus for others to improve the data on wliicli they are based.
Modifying GNP
Probably the largest effort has gone into estimating a morfified or green
measure of national product. While there remain sometimes liighly
teclinical disputes about tlic best way of making these modifications.
88
Blueprint for a Siisluinaff/r F.iononu/
Box 4 .2 Estim ating Overall Wealth
There are formidable probtems in estimating wealth as shown in Table 4 .1 .
The World Bank’s procedures can be summarized as follows:
Mineral and energy reserves are estifnated. They are then valued by
looking at the net profits that could be achieved from those reserves. The net
profit is basically Ihe price obtained for the resource ex mine minus the costs
of extraction, where costs include the depreciation on conventional capital
used to extract the resource. The flow of net profits is reduced to a present
value (see Chapter 2 ) and [his is the value of Ihe reserve.
Much the same procedure is used for timber, but if the resource is suslainable then the annual flow of profits is estimated to infinity (since the resource
can be renewed for ever). Tew of the world’s resources are, however, sustain­
ably harvested.
Crop and pasture land is also similarly treated. II yields a flow of revenues
over time, revenues that should increase if there is evidence of productivity
increases. Revenues are measured by using the world price of the crop. Costs
are deducted to obtain profits (or rentals).
The approach to protected areas should be based on whal people are
willing to pay lo protect them. But data problems make this difficult so the
land is valued at its opportunily cost, that is at what it would obtain in some
alternative use such as pasture land.
Km is based on what is known as a perpetual inventory model which
enables flows of investment expenditures to be converted into values for Individ­
ual man-made assets.
K h , Ihe largest item and the most difficult to estimate, is derived as a
residual. The procedure is to calculate the following:
(a)
(b)
(c)
(d)
add up the economic returns lo labour in the agricultural sector, estimated
as 45 per cent of the overall returns (agricultural GNP). This nets out the
returns to land.
Add non-agricullural GNP to (a)
Deduct deprecialion in (a) and (b)
Deduct any rentals to minerals and energy reserves.
Steps fa) to (d) give an estimate of the overall returns to labour and man-made
capital. Hence man-made capital should now be deducted, to give the return
to human capital in GNP per annum. These annual returns are summed over
the remaining life expectancy of the relevant population and discounted to give
the present value of the future returns to Kh.
Data limitations are severe, but will be become less'daunting as the
research expands.
th ere is growing a c c e p ta n c e of th e p ro ced u re outlined below. It is n e c e s ­
s a r y to p r e s e n t th e m a te ria l afgebraica/fy b u t th e re is a n in tu itiv e
e x p la n a tio n for each stage.
First, w e d efine G N P as the su m o f all the in co m e s in the. eco n o m y.
T h o s e in c o m e s are c ith e r sp en t on go o ds (co n su m ed ) or saved . Writing
C for c o n su m p tio n an d S for saving w e have:
m cuiunny csunainacie uem opm eui: Lcononuc Approac/tes
89
GNP = C + S
Net natio nal p rod uct (NNPJ is trad itio nally defined as G N P m inus the
depreciation o n m an -m ad e a s s e t s Km. Essentially, this is the incom e left
o v e r a fte r w e p u t m o n e y to one side fo r th e depreciation o f asse ts. Note
that failure to put this money to one side would one day mean finding,
for exam ple, that m achinery has worn out and that there are no funds to
replace it. This is a truly unsustainable po sitio n . So, we can also write:
NNP = G N P - dK/ii
where dKm is depreciation on man-made cap ital.
Putting the two equations together we have;
NNP = C + S - 410m
But there are other assets in the economy, the depreciation on which is
ignored by this formula, namely the depreciation on K/i and K«, Putting
K/i to one side for the moment, we can modify the above equation to be;
N N P ' = C + S - 4K/H where dKn is now the lo ss in value o f n atu ral a sse ts. The * on NNP
reminds us that we are now m easuring a m odified version of NNP
Finally, we can investigate dKn. Suppose Km co nsists of two kinds of
assets: non-renew able ones, like oil, and renewable ones, like fisheries
or timber. For non-renewable resources each year there are discoveries
D of new resources and there is an extraction rate Q . So, the net lo ss o f
these resources each year is given by:
Loss of non-renewables = Q - D
For renewables the sam e co nsiderations hold but the discovery rate is
replaced by the natural rate at which such reso urces grow (the biologi­
cal growth rate, B) and the extraction rate is replaced by the harvesting
rate H.
Loss o f renewables = H - B
In each case we need to value these lo sse s (and of course, the lo sses
could be gains if, for exam ple harvests are less than natural growth). We
therefore m ultiply each of the net changes by the profit (more strictly,
som ething called the rental w hich is m easured by p rice m inus the
marginal c o s t of extraction In uconom ics, the rental is a m easure of
'esoiirce scarcity, h e n c e its use as an indicator of depreciation) which is
the price minus the cost of extraction (harvesting). Call this R« for non­
renewables, and Rr for renewables. Then the d ep reciation on natural
resources is given b/:
( K/i = R, (O - D) -f R^(H - B)
Finally, we n e e d to bear in mind that there is a lso pollution and this
a ffects th e en viron m en t too. We can treat this an a lo g o u sly with
resources a b o v e by thinking of the environment as suffering from pollu­
tion due to e m issio n s E but with the environment having s o m e capacity
to assim ilate pollution A. Then the net ch ange in the environm ent is
given by E-A and wc have to value that. The valuation is in fact the
willingness o f the population to pay to avoid that pollution WTR
So. the overall depreciation on natural resources and the environ­
ment is given by:
ifKa’ = RJQ
D) 4- R^(H
B) -f WTP(E--A)
The final equation looks a little daunting:
NNP* = C
-ffKn*|
Or:
NNP* = C 4- S - (IlOn - R^,(Q
D) - R^(| I - B) - \VTP(E-A)
We have taken the trouble to spell the equation out b eca u se it will have
another u s e in the next s e c tio n . While it lo o k s c o m p lic a te d we can
rewrite it in words <is follows:
Remembering thatC4-S
= GNP
ve have:
NNP* = GNP - depreciation on man-made capital - depreciation of
natural resources and the environment.
he long version sh o w s what kind of information we need to collect in
•rder to e stim a te NNP*. the green national product. A calculation of
reen national prirtiuct for Costa Rica is given in Box 4,3.
tvieuiunng ousiainaDie ueveiopmenl: tconom ic Approaches
Box 4 .3 M odified National Product for Costa Rica
Solozarno et al (1 9 9 1 ) used the procedures discussed in the main text to
estimate a revised national product for Costa Rica. Costa Rica has three signif­
icant environmental problems-, deforestation, soil erosion and aver/ishmg.
Remote sensing and geographicai information systems were used to estimate
the physical changes in forest cover and mangroves, and such systems were
also used to estimate rates of soil erosion. Sampling of fisheries was used to
estimate the relationship between biological yields of fish and rates of harvest.
For economic valuation the procedures were also sophisticated. For forests
the procedure was to estimate the economic value of the change in standing
timber for different types of timber. The relevant unit value that is applied to
the timber is known as the stumpage value. Stumpage value is defined as the
difference between the market price of the limber and the cost of harvesting,
transport and milling (processing the tree into timber). Stumpage value can be
thought of as the most that a timber concessionaire would be willing to pay for
the right to harvest the trees. As the formula in the main text shows, if harvests
exceed natural growth {and managed replanting), the forest is potentially
unsustainable. Flence, the depreciation on the forest equals the change in the
standing timber multiplied by the stumpage value.
Soil erosion was estimated using the universal soil loss equation which
relates soil loss to topography, rainfall, soil management and erositivity. The
resulting volume of eroded soil was converted to the units of fertilizer needed
to offset that erosion, together with the labour costs that would be involved.
Since fertilizer has a price, this gives an economic value of the erosion. While
quite tvidely used, this procedure is somewhat doubtful, since it assumes that
the value of erosion is measured by what it costs to compensate for it. But it
may net be worthwhile to do this: the replacement costs may. for example, be
higher than the actual crop losses.
Finally, fishery losses from overfishing were valued according to the market
price Of the fish minus the costs. Once again, the relevant depreciation of the
fishery is measured by the difference between catch rates and biological regen­
eration rates.
The end results for 1988 are as follows:
Million colones (1984)
GDP 2 0 7 ,8 1 5
Minus dKm 5,301
= NDP 2 0 2 ,5 1 5
Minus dKn 2 1 ,1 6 3
forest depreciation17, 890
soil erosion 2 ,6 2 3
overfishing 6 5 0
.
= greenNDP 181,35 2
GDP is conventionally measured (GDP rather than GNP) but the difference is
not important here). We get to net domestic product (NDP) by deducting depre­
ciation on Km. Then we deduct the depreciation on Kn. Note that depreciation
on Kn is considerably larger than fhe depreciation on Km. The end result is
green net domestic product. The depreciation on Kn is some 10 per cent of the
original GDP sum, revealing the magnitude of resource depreciation in Costa
Rica. I^or 1 9 7 0 -8 9 annual depreciation varied between 3 .5 and 10.2 per
cent. Added up over the whole period, resource depreciation equalled one
year's entire GDR
Source; Solozarno et al, 1991
91
92
BhiepriiU [or <i S iislainah lc Econoinij
H o w useful is green national product? In Blueprint I we a d v o c a te d
the m rn s u re m c n t o f green national product but did not regard it as a
high priority. T h ere were several reasons for this and they remain valid
today, ten years later, First and toremost, by itself green national product
d oes not tell us whether we arc sustainable or not. It fails the test in tro ­
duced earlier o f there being an origin, a point b elow which the indicator
shows non-sustainability and a point above which the indicator says we
are sustainable. But green national product measures do not tell us much
a b o u t sustainability The fact that, as is usually the cose, green national
product lies below conventionally measured national product does not
m ean the e co n o m y is unsustainable. It certainly points that way because
it is telling us that we are depreciating the asset base o f the e co n o m y
and we c a n n o t d o th a t for ever. But the linkage is not very explicit. A
second reason derives from the exaggerated e xp e c ta tio n s that p eo p le
had for green measures o f G N P M an y argued t h a t because G N P is so
firmly e m b e d d e d in o u r financial and e c o n o m ic reports, p e o p le have
c o m e to believe it is a good measure o f e c o n o m ic p erform ance and o f
changes in human well-being. If only we had a changed measure, then,
p eople would start to change their minds and would pay as much a tt e n ­
tion to what is happening to the environment IrfKn) as they would to the
economy. We d o u b te d this view and our d o u b ts have been borne out.
There is very little evidence that modified measures o f N N P have led to
any change. By and large this is because there is little in such measures
to induce behavioural change.
Overall, then, green p ro d u ct measures ask the right questions and
produce interesting results, but not so interesting th a t they are likely to
induce behavioural change on the part of decision makers. At the tim e
we w ro te Blueprint I . however, we had nothing to offer by way of an alter­
native. Since then we have found a simple modification o f green product
- genuine saving.
Genuine Saving
G e n u in e saving was first in tro d u c ed in Pearce a n d A tkin son (1993)
Today, the c o n c e p t o f gen uin e saving has b ee n a d o p t e d by the World
Bank, who have estim ated it for over 100 countries.
Th(' concept is easily explained because it has already been derived
in th e discussion on green n atio n al p ro d u ct. We re p ea t th e basic
e qu ation for green net national product, which is;
NNP* = C -ElS-rf(O n-r/Kfi*|
We define the expression inside the square brackets as genuine saving. It
is the a m o u n t that is saved in the economy, minus the depreciation on
c ap ital a sse ts. Intuitioii tells us that if our eco no m y is a firm, and the
firm fails to put re so u rce s to o n e sid e [savings) at le a st e q u a l to the
depreciation on factory and m achinery then the day will co m e when the
m ach in ery needs replacing an d there will be no funds to fin ance their
re p la ce m e n t. The firm m ight borrow the money, but th is is s im p ly
p o stp o n in g the day when re p la ce m e n t is im p o ssib le , b e c a u s e the
borrowing itself has to be repaid. A firm that fails to engage in this proper
liind of saving activity is going to go banlcrupt, or, to re p h ra se it, it is
unsustainable, S o it is for an eco n o m y - exactly the sam e logic app lies. .
T h is intuition a lso p o in ts the way tow ards a sim p le in d ic a to r of
sustainability, namely;
Sp = S - r/Km - dKn*
where
m eans genuine savings. We can se e that the in dicato r h a s been
extracted from the basic equation for green national product, but the 5p
m ea su re o v e rc o m e s one of th e m ain p ro blem s with green n atio n al
product: it has an origin. An eco n o m y that is potentially su stain a b le will
have Sg > 0 and one that is potentially unsustainable will have Sq < 0 .
(In reality, th e r e a re so m e te ch n ical com plications, but the b asic rule is
robust.)
.
Moreover, we can rank co u n tries according to their genuine savings.
The value of ranking is that it draws political attention to perform ance.
No country w ish es to have negative genuine savings, and co u n tries with
positive genuine savings rates will tend to prefer to be higher up the 5q
index than lower down. O sten sib ly, th e m odified n a tio n al p ro d u ct
m easure could have done this, for exam ple, by ranking co u n tries a c c o rd ­
ing to the ratio of dKn to GNR but the savings indicator ap p ears to be
powerful in this respect.
Two further ch an g e s need to be m ade to the g e n u in e sa v in g s
formula. We have focused on depreciation of two capital sto ck s, Kr?; and
K«. W hat o f hum an capital? It is o f co u rse possible to d estro y knowledge
- think of the lo ss of in d ig en o u s Itnowledge when e th n ic g ro u p s are
forced to migrate. But in general, K/t increases, it d oes not d ecre a se . We
th erefo re need to add the a p p re c ia tio n of hum an kn o w led g e. O n e,
adm ittedly sim ple, indicator for this is to add in llie current expenditure
on education. This makes Che S q m easure;
’
= S - ( f K m - c f K ji' -k aKfi
where a is the rate o f appreciation.
The se co n d cfiange is m ore of a tidying-up factor, and allow s for the
fact that m any countries borrow abroad to finance d o m estic investm ent
expenditure. An eco n o m y's gross saving is equal to its gross d o m estic
Bltieprml {or a Susluiiiablc’ Economij
94
in v e stm en t m in u s a n y foreign borrowing, sim p ly b e c a u s e it is fin ancin g
s o m e of th e in v e s tm e n t from foreign b o rro w in g . B e fo re c o m p u tin g
g e n u in e saving s, th en , w e nei-tl lo ca lcu la te g ro ss savin g s w here:
G ro s s d o m e stic in v e stm en t - n et foreign borrow ing = G ro s s sa v in g s
an d
G ro s s sa v in g s - dKm - dKn = genuine saving s
Table 4,2 sh o w s th e World b a n k 's e stim a te s of Srj for v a rio u s reg io ns of
the w orld. T h e e stim a te s are n o rm alized by e x p ressin g e a c h co m p o n e n t
a s a p e rce n tag e of G N P - the form ula:
S a ^ 5 - 4K mi - 4K)f*
Is rew ritten:
S^/GNP = S /G N P - 4K)H/GNP - 4K/t‘ /G N P
R e c a ll tliat a n e g a tiv e Sq su g g e sts u n s n s ta in a b iiity a n d a p o s itiv e Scf
su g g e sts sustainab ility.
Table 4,2
War/4 Recjion Esliwales of Genuute Savings Iperccntage o{ GNP)
Region
Sub-Saharan Africa
Latin America and Caribbean
East Asia and Pacific
Middle Easi/North Africa
South Asia
OECD
Average
1 9 7 0 -7 9
7.3
10.4
15.1
- 8 .9
7.2
15.7
Average
1980 89
1993
-3 .2
5.5
18.6
- 8 .8
7.6
15.7
-1 .1
6.1
2 1 .3
- 1 .8
6 .4
13.9
Source.- World Bank, 1997.
Table 4.2 sh o w s two reg io n s with negative genuine saving s. su b -S a h a ra n
A frica and the M id d le East/N o rth A frica. A frica te n d s to h av e low gro ss
sa v in g s ra te s to begin w ith, but d e d u ctin g d e p re c ia tio n p u s h e s it into
unsustainability, even allo w in g for in vestm en t in hum an c a p ita l through
e d u ca tio n . T h e M id dle E a s t p ic t u r e is m ore co m p lex. What h a p p e n s here
is that the o u tco m e is heavily in flu en ced by the fact that th e se c o u n trie s
h av e large oil reserv es. Taking oil o ut of the ground c o n s titu te s d e p re c i­
atio n , But, of c o u rse , su sta in a b ility is ensu red if th e se re v e n u e s (rentals)
are rein ve ste d In o th e r form s o f cap ital. Table 4.2 su g g e sts that at least
Approaches
95
so m e M iddle E a st c o u n trie s have co n su m ed a large part o f the p ro c e e d s
of oil wealth rather than reinvesting it.
T h e g enu ine sa v in g s m ea su re a lso h a s the c a p a c it y to su rp rise, a s
we sh o w ed in Blueprint 3 (Pearce. 1993). T h e re th e g en u in e saving s in d ica ­
tor r e v e a le d th a t t h e U K w a s pursuing an u n s u s ta in a b le d e v e lo p m e n t
path thro u gho u t m ost of th e 1980s. A sig n ifica n t feature w as th e fact
that re v e n u e s from N o rth S e a oil w ere b e in g c o n s u m e d ra th e r th an
reinvested. Air pollution dam age also p lays a sig n ifican t role in creatin g
u n su sta in a b ility (H am ilto n an d A tk in so n , 1996). W hile n o t u n s u s ta in ­
able, a sim ila r p ictu re is revealed for the U S w here g ro ss savin g s ra te s
are low to begin with. T h e effect of d ed u ctin g re so u rc e a n d e n v iro n m en ­
tal d ep reciatio n h as been to m ake the U S m arginally su sta in a b le (S^ is
just above zero).
Technological Change
A m om ent's reflection on the underlying th eo ry of su sta in a b le d eveio p m ent re v e als the n eg lect o f an im po rtan t featu re in the d e v e lo p m e n t
p ro c e ss : te c h n o lo g ic a l c h a n g e . We argued in C h a p t e r 3 that c a p ita l
sto ck s (per head) should be rising over tim e to e n su re sustainability. But
each unit of capital co u ld be m ade to work m ore pro d u ctively through
time. If so , w e could even h av e declining cap ita l sto c k s, but with in c re a s­
ing ability to g enerate w ell-b ein g b e c a u s e e a c h u n it o f ca p ita l sto c k is
m ore productive. T his rising productivity of cap ital s to c k s is a feature of
technological change. M oreover, tech n o lo g ical ch a n g e will attach to K/i
- that is, hu m an s th e m se lv e s b e co m e m ore p ro d u ctiv e ; to K;)i - tra d i­
tional capital b e co m e s m ore productive, and even to K h sin ce a unit of
oil or copper, for exam ple, m ay becom e m ore p ro d u ctive.
H am ilton et al (1998) sh o w that th e
fo rm u la n e e d s a fu rther
modification to allow for tech n o lo g ical change;
- Sg = S - (tlOH - d K n * + oK/i -f PV(T)
Vhere the term PV(T) is the p resen t value of future te ch n o lo g ica l ch an g e,
:hat is the flow of w ell-being from te ch n o lo g ical ch a n g e all d isc o u n te d
ja ck to the pre.sent. Clearly, w hat m atters is the sc a le o f th is effect. S o m e
luthors have su g g ested th at PV(T) is very large in d e e d . W eitzm an and
-ofgren (1997), for exam ple, suggest that G N P in the U S is u n d erstated
jy s o m e 40 per cen t b e c a u s e of the failure of th e a c c o u n t s to reflect
uture gains from te c h n o lo g ic a l ch an g e . If th is is right, th en m aking
id ju stm ents for 4 K h (p e rh a p s of the o rd e r o f 2 - 1 0 p e r ce n t o f G N P)
rould ap p ear to be a w a ste of time. The a d ju s tm e n ts are sw am p ed by
he huge gains from te ch n o lo g ica l change.
96
Blueprint for u SuFlainafdi' F.coiwmy
The (KVtdemic firgumcnt •ontinues nncl is hiirly technical. Bui the liter­
ature is beginning to suggest that what m atters is the nature of
technological change. Is it exogenous or endogenous? Exogenous techni­
cal change falls like manna In mi heaver. No one has to do anytliing about
it, it sim ijly occurs. Endogenous change is embodied in the various forms
o f capital and comes about Irom explicit decisions w ithin the economy
In fiiis case, the creation o f new technology uses scarce resources that
could otherwise be employed elsewhere in production,
By and large, it would appear that if all technological change is
exogenous, then PV|T) is potentially huge. It all technological change is
e n d o gen o u s, PVfTl tends towards zero. Hamilton et al (1998) suggest
that, in practice, most technological change is endogenous and that a
typical adjustment for PV(T) is about 3 per cent for an advanced
economy. If .so. the genuine saving calculation remains very relevant
Additionally, calculating PV(T) in the US is o n e thing, but it is far less
clear that poor countries can expect such rates of change Even in rich
countries, it is as well to bear in mind that not all technological change
is benevolent. Chlorofluorocarbons were hailed as a great technical
bre ikthrough in the 193hs only to be the subject of a major interna­
tional agreement to phase them out at the end of the 20th century
because of their role in dcfileting the stratospheric ozone layer. Som e
might argue that genetic modification through biotechnology is going
the sam e way.
Social Capital
There is o n e other form of capital that needs consideration in the discus­
sion about sustainability: this is social capital. Putnam (1993) speaks of
social capital as comprisifig certain features of social organisation norms of behaviour, networks of interactions between people and
betw een institutions, and trust between people. Empirical studies of
eco n o m ic growth have shown tiiat conventional growth-accounting
m o d els (stressing labour, capital, technology) explain only a limited '
amount of the difference between growth rates in different economies.
Studies of the Asian 'miracle' econom ies, before the recent crisis,
suggested that institutional arrangements for cooperation and informatfon exchange may be as. if not more, important than conventional
factors. But close inter-personal and intcr-institutional arrangements
may not always be good for sustainable development. After all, pricefixing cartels are a form of social arrangement, as is the Mafia. This
suggests that social capital may have positive and negative aspects.
On the positive side it is suggested that social capital contributes to
econom ic develooment in the following ways:
•
•
• •
Flows of information between econom ic agents are better and higher
if there are clo se r so cia l relatio n sh ip s. Su ch flow s may relate to
anything from price inform ation, inform ation on the availab ility of
m aterials or labour, through to inform ation on the credit w orthiness
o f in d iv id u a l agents;
Trust reduces the need to search out inform ation in order to make a
transaction: that is transaction co sts can be reduced. Trust may also
result in behaviour which avoids the need to make laws and hence
to intervene via government;
Social links between individuals and organisations and governm ent
also reduce the need for overt public control. Governm ents may find
it easier and more efficient to operate via established so cial lin ks
than to legislate. The rise of voluntary agreem ents as a m eans to
co ntro l environm ental problem s may be a case in point. Polluters
sim ply agree lo self-regulate and, in turn, selbregulation will be al!
the m ore efficient if the polluters have social arrangem ents whereby
they trust each other.
Also on the p ositive side, so cial capital co n trib u te s to environm ental
im provem ent by;
•
•
•
•
•
Substituting for other form s of capital, especially man-made capital.
Arrangem ents to share machinery (eg tracto rs, harvesters) mean that
fewer tractors are needed;
Reducing the high discount rates that often imperil the environment.
This happens because individual in se cu rity is reduced by ganging
together to fight particular causes and by spreading risks among the
social group;
.
.
Reducing external e ffe cts, - the sp illo v e r e ffe cts o f one ag en t's
actio ns on the well-being of another. Effectively, such behaviour is
inh ib ited by the co ncern tor neighbours and third parties arisin g
from social norms o f behaviour;
Resolving the risks arising from common property. Common property
invo lves a w hole com m unity owning and m anaging a resource, a
situation that has risks o f environmental destruction if the resulting
com m unal m anagem ent system b reaks dow n. T h e stronger the
social ties, the less likely the management system is to collapse;
inh ib itin g an tiso cial behaviour that dam ages the enviro n m en t,
w hether it is sim ply the dumping of illicit w aste, litter or perverse
destruction of wildlife.
■
Social capital could have negative results by keeping contracts to those
within the so cial circle, when those outside are more efficient. Exam ples
98
Bluei’riul for ii Siisltiin ufilc Fom oiny
inclurle p rice-fixiJij;. closed-LOiUtdCt .iward byslem s, and oven the
requireni' tu that sniall firms ttistliu le su in c soc ial welfare system to look
after tho:.e in ihe social group imposing costs that impair productivity.
One might siimmarize these pii >lilems as ih " creation of rent by restric­
tive activit* and tfirougii lobbyiin; of go veiiiiiu'iii and others.
Can social capital be rneasurcd;* Studies aic lii their infancy but there
are prom ising directio ns. First, tlic breakdown of social capital will be
revealed in various .social indicators such as crim e and v io le n ce , and
perhaps liv break-up of the fatmly. SucIi negative indicators offer some
scope for analysis. On the positive side, Foster et al (in press) conducted
m ajor survi.-ys to elicit b o lli the nublic's w illingness to pay and the
wiilingne.ss to pay of voluntary sector users for voluntary sector services.
The ptiblic were askcri their w illiii{;ness lo pay to avoid the closu re of
voluntary sector a c liv iiie so n the hypothetical assum ption that the chari­
ties had ’ 0 clo se for lack of government sup port. The study revealed
that, on civof.ige. tlic general public were willing to pay around 40 per
cent more fur the charities th;in tliey actually gave in d o n atio n s. The
total wiJfingncss to pay can be thought of as a measure of concern for
others - a major dimension of social capital.
Social cafiit.il therefore presents a new and challenging dimension
of sustainable developm ent. It may, as som e have argued, account for
the dynam ism of some econom ies and even for lower environm ental
damage tiian might otherwise occur. For those concerned with the break­
down of traditional social values, social sustninabiiity indicators will also
be important.
Weak and Strong Sustainability Again
All of the indicators in this chapter relate to weak sustainability, that is
they all assum e that there is sonic form of substitution between capital
asset.s. Several criticism s have been advanced against this view of
sustainability.
On the techniciil side, it has been obsrrrved that positive genuine
savings do not necessarily indicate sustainability. Atkinson et al (1997)
suggest that genuine saving is a one-sided test for (weak) sustainability.
What is proposed is a more cautious test for unsustainable behaviour
rather than sustainability perse. E \e n so, the empirical evidence that is
emerging indicate.s many countries appear to fail this apparently simple
test, as we observed above.
M artinez-Alier ( 1995). Victor et al (1996) and Cab eza-C utes ( 19961
have pre.ssed the case for indicaiors that effectively deny the range of
snbstituti'in possibilities embodied in genuine savings. In other words,
their critique is that weak sustainability is not strong sustainability. These
M easuring Siistu iita b lc Developm ent: Econom ic Approaches
99
are largely negative criticisms in that no actual alternative indicators are
presented but perhaps serve to make the im portant point that genuine
savings - or for that m atter any single sustainability m easure - is not
exclusive as a means to evaluate progress towards sustainable develo p ­
ment. N o n e th e le ss , these critiques o ve rlo o k
the fact th a t s tro n g
sustainability is not a unique measure o f sustainability either. Indeed,
strong sustainability has lo be sup p le m e n te d with weak sustainability,
since one c an n o t focus narrowly on improving just one capital asset if
others are depreciating. Nor has empirical evidence been advanced to
the effect th a t substitution is the wrong assum ption. The p roblem for
advocates o f strong sustainability is that assertions o f non-substitutabil­
ity do n o t c o n s titu te evidence on non -s u bs titu tab ility. Those who
criticize weak sustainability for assum ing s u b s titu ta b ility th e re fo re
commit at least a parallel fallacy in assuming non-substitution, much as
we may sympathize with the emotional basis o f strong sustainability.
Martinez-Alier (1995) notes that countries failing weak sustainability
tests tend to be located'in the developing world, although, as we have
seen, d eveloped countries can also fail the genuine savings test. M a n y
developing countries are highly dependent on resource extraction activi­
ties and th e d ep le tio n o f these assets o ften means th a t high levels o f
savings need to be generated if aggregate real wealth is not to be run
down. Given tha t these resources are often traded with d eveloped
countries, a freq u ent criticism is that this resource trade works to the
disadvantage o f po o r countries. Put a n o t h e r way. rich countries can
import their sustainability a l the expense o f the unsustainability o f poor
countries. The general argument appears to be a b o u t rcs|jonsibiJity in
that developed countries are to a large extent reliant on foi cign resources
to support their domestic economies. Indeed, several of these developed
countries (eg the Netherlands and Germany) have expressed concern
over their responsibility for resource depletion in other countries.
There is, in principle, nothing to sto p any importing country assist­
ing a d evelo ping c ou n try upon whose resource it is d e p e n d e n t in its
efforts to avoid persistently non-negative genuine savings via, say, bilat­
eral aid, In d eed , there are existing sch em es to stabilize the exp o rt
earnings o f primary producers. However, the e xten d ed rationale would
be to secure sustainability in ihcse ( n i in tr ie s ra th e r than to m aintain
security of supply. Pre.sumably. any assistance, if forthcnmiiig. would be
targeted tow ard those low-incom e countries where th e [jo te n tial for
saving out o f income is severely restricted. In this respect, indicators of
these dependencies would be useful.
C ab e za-G u tes (19 96 ) has q u e s tio n e d th e use o f g enuine savings
where countries such as Japan and the US a p p e a r t o pass this weak
sustainability test, The popular perception is that these countries ought
10 0
Blueprint for a Sustainahlc Ecoiwimi
. not to he sustainable. To s o m e extenl. however, there is iittie point in
developing indicators simply to confirm preconceived views, although,
as we noted, the US d o e s not emerge from the genuine savings analysis
as unconditionally sustainable, whilst the UK exhibited significantly
negative genuine savings in the years 1980-86.
It is worth noting that the genuine savings indicator is able to
capture a significant feature of pollution problems, namely transbound­
ary p o llu b on flows. The rationale for adjusting m e a su r es of national
income, in the presence of transboundary effects, is an extension of the
polluter-pays-principle to the domain of national accounting. This means
that the e s t im a te s of the unit dam age c o s t s of pollution in a given
country should include all c o sts, including th o s e in other nations. The
argument for this treatment ol iransboundary pollution in the c a s e of
savings rules is. if anything, even stio n g cr S o m e portion of a given
country's total savings should, at least notionally, be set aside in order
to c o m p e n s a te the recipients of the pollution em itted and transferred
across International boundaries
We su g g e st that a g o o d jiart of the weak versus strong d e b a te is
misguided s in c e weak sustainability is c o m m o n to both ap p ro ach es.
N onetheless, crucial issues remain. Perhaps we have reached a stage in
human d evelopm ent when additional environmental depreciation d o e s
have such high c o s t s that it c o n siiu ites dr facto non-substitutability. This
is what many ecologists have been saying for s o m e time But advocates
of strong sustainability have been strongest in assertion and weakest in
offering empiricaJ su b sta n ce for their views. That d o e s not make them
wrong, but it d o e s suggest lliey fiave yet to be proved right.
Thr remaining challenge is lo turn sustainability indicators, such as
genuine savings, into ex ante decision-guiding measures. At the moment,
most sustainability indicators have an ex post characteristic, that is they
are useful in finding out whether a country, a sector, or a corporation has
b e e n s u sta in a b le or is currently sustainable. Ex ante indicators would
enable a decision maker to look forward in time and answer qu estion s
such as: is this policy-going to contribute to sustainability? Several
suggestions can be made for this important policy research agenda.
First, all policy, whether it is aimed at environmental goals or not,
must be appraised for its environm ental impact. The environm ental
effects of policies are uncertain, difficult to quantify and even difficult to
identify.
S e c o n d , the m on etization of environmental im pacts n e e d s to be
encouraged and broadened.
Third, in c o m m o n with modern e co n o m ic growth theory, work on
sustainability indicators s u g g e s ts that investm ent and tech n o log ical
change are key measures for sound and sustainable eco n o m ic develop-
Measiirtiig Sustainable Development: Economic Approaches
101
m ent. In vestm ent in hum an cap ital clearly b eco n res a priority, but there
h a s a lso now to be a stronger e m p h asis on in vestm en t in so cia l cap ital
a s w ell. A s far a s th e e n v iro n m e n t is c 6 n c e r n e d . th e g e n u in e sa v in g s
a p p ro ach clearly sh o w s that it ca n n o t be treated a s a d isp e n sa b le item
in e c o n o m ic d e v e lo p m e n t p o lic y It is now c le a r that w h o le reg io n s of
the world - su b -S a h a ran Africa in particular - have im paired their d e ve l­
o pm en t p ro sp e c ts by d epleting natural capital.
Measuring Sustainable
Development: Ecologica
Approaches
In tro d u ctio n
E c o lo g ie s have profM sed several ind icaiors of sustainability. Unlike
econom ic valuaiion approacfius, ecological indicators are not concerned
with m e.isuring the im pacts of environm ental degradation on human
welfare. Instead, they arc generally used to measure either the overall
sta te of the environm ent or the health of .specific eco system s. Such
ecological approaches may be ju sl as vital as econom ic valuation
approaches for the design of susl.iinable development policies.
We focus on those ecological approaches that relate to the ability of
the environment to sustain essential ecological resources and functions.
These include various rHeastrre.s of ecosystem health, functioning and
threshold lim its, such as biological diversity indicators, estim ates of
species ioss. carrying capacity, ecological lootprinls, and indicators of
ecosystem stability, resilience and sustainability As discussed in Chapter
2. since there may be limits on the ability of any econom y to substitute
human and physic il capital for certain key resources and services of
eco system s, then ecological Indicators may have an im portant role in
providing inform ation on those Irreplaceable com ponents of natural
capital that may be critical to sustaining liuman welfare.
We start with tlie conccfd of bioingical diversity and the construc­
tion of biodiversity indicator.s.
asuring Suslaim bie Development. Ecological Approactiei
103
Biodiversity indicators
)ust as many economists consider measures of sustainable income to be
im portant indicators o f the welfare generated by econom ic systems,
ecologists have g e n e r a lly a g r e e d th a t an im portant indicator o f the state
or health o f any natural environment is the degree o f diversity that it
contains. Biological diversity - or biodiversity for short - refers to the
range o f variation or differences in living organisms and their environ­
ments. The diversity o f natural life can be distinguished by the three
main levels o f biological hierarchy: genes, species and ecosystems.
(UNER 1995; WCMC, 1992; Wilson. 1992),
According to Magurran (1988), there are three reasons why biologi­
cal diversity has become a centra! focus of ecology.
•
•
•
The spatial and temporal variation in diversity which intrigued early
biologists and naturalists still holds tlie fascination o f the modern
ecologist;
measures o f diversity have come to be viewed as indicators o f the
well-being o f ecological systems;
considerable debate continues to surround the measurement and
definition o f biological diversity, despite the exten.sive range of indices
and models that have been developed for measuring diversity.
To some extent, current scientific debate over the meaning and
relevance o f various indices and models o f biological diversity reflects
the various concerns and uncertainty over what declining biodiversity
might mean for ecosystems. For example, to ecologists the loss o f
biological diversity is n o t simply a p ro b k m o f the e xtin ctio n o f a few
charismatic species, such as African rhinos, the s p o tte d owl o r the
panda, There is also a concern about depleting the pool o f 'w ild' genetic
material available for scientific, medical and educational research, as
well as concern over the impacts of the declining diversity o f natural
ecosystems on their ability to provide life support functions and essen­
tial resources and services.
On the o ther hand, emphasizing the im portant ecological role of
diversity at the genetic, species and ecosystem levels has made it very
difficult for the scientific community to develop a consensus definition of
biological diversity that can be made operational for policy purposes,
iven tiiough ecologists may agree that ciniservation o f biological diver;ity is a good thing, it is not always obvious what policy objective should
ae pursued to achieve this goal. For example, the param ount goal of
aiodiversity conservation has been chaiacterized by some ecologists as
insuring sufficient variation in the genetic make-up o f specic.s.
104
B h ic p r in l fo r
ci
Sn< toino[> lc E co n o im i
Alternatively, conservation o f biological diversity has also been in te r­
preted to mean ic d iirin g th rca ls to species extinction and richness.
Finally, at the broadcs' level, biodiversity conservation has been equated
with the conservation o f natural ecosystems and their com ponents in the
face o f conversion and m odification from human activities For recent
discussion o f the various interpretations by ecologists and conservation'
ists o f biological diversity see Ehrlich and Ehrlich 0992J, McNeely et al
(19901. Reid ct at 11993), UNEIMI995), WCMC (1992). Weisscngcr (1990)
and Wilson (1992). For a fiislo ry o f biodiversity loss as a scientific and
historic concern, see Barbicr et al (1994) and Wilson (1992),
Thus despite the increased scientific attention paid to biological diver­
sity as an im portant indicator o f ecological well-being, defining a single
comprehensive indicator o f biological diversity for policy purposes has
remained an elusive goal. To many ecologists, the concept o f b io d iv ersity
’is like an optical illusion. The more it is looked at. the less clearly defined
it appears to be and viewing it from different angles can load to different
perceptions of what is involved’ (Magurran. 1988). Indeed, some scientists
go St' far as to dismiss the term as a non-concept (Flurlbert, 1971).
However, s o m e ecologists and conservationists have argued that
developing a singF indicator o f biodiversity is the wrong approach, as
no one indicator can possilily convey to policy makers inform ation on
diversity sim ultaneously al the genetic, species and ecosystem level.
Instead, recent efforts to provide a framework for assessing conditions
and trctuls in biodiversity st.tius focus on developing an appropriate set
o f multiple indicators for giiirling |)olicy decisions. Rather than a tte m p t­
ing to provide a universal in d ic a to r o f biodiversity status and trends,
such approdches acknowledge that the difficulty in capturing a complex
concept such as biodiversity in a single index suggests that indicators
must become more policy specific. That is, a different indicator should
be used depending on the stated objective o f conseirmtion policy.
For example. Reid et al (1993) argue tliat, if the conservation objec­
tive is to minimize species extinction, then a u.seful indicator would be
changes in the num ber-of species over time. Alternatively, if the objec- '
tive is to minimize (he loss o f species diversity then such an indicator is
misleading as it says little abou! the disiincttvenes.s o f each species. As
shown in Table 5 . 1, the authors suggest a sot o f 22 alternative indicators
o f biodiversity based on three categories:
•
Indicators used to measure the diversity o f wild species and genetic
diversity:
•
•
indicators used to measure diversity at the com m unity/habitat level;
indicators used to assess dom esticated species (the d iversity o f
crops and livestock).
iiu il A pproadii'i
105
Ta b le 5 . 1 A M u ltip le Set o f Im hcaton fo r B iodiw rsiU j C oiiseru tdou
In d ica to r
B io d iv e r s ity co n se rv a tio n c o n c e rn s
G e n e tic
d iv e rs ity
S p e c ie s
d iv e rs ity
X
X
X
X
X
X
/
X
X
X
X
X
X
X
C o m m u n ity
d iv e rs ity
Wild species and genetic diversity
1 Species richness (number, number
per unit area, number per habitat type)
2 Species threatened w ith extinction
(number or per cent)
3 Species threatened w ith extirpation
(number or per cent)
4 Endemic species (num ber or per cent)
5 Endemic species threatened with
extinction (number or per cent)
6 Species risk index
7 Species w ith stable or increasing
populations (num ber or per cent)
B Species w ith decreasing populations
(number or per cent)
9 Threatened species in protected areas
(number or per cent)
10 Endemic species in protected areas
(number or per cent)
11 Threatened species in ex situ
collections (number or per cent)
12 Threatened species w ith viable
ex situ populations (num ber or
per cent)
13 Species used by local residents
(number or per cent)
X
Community diversity
14 Percentage of area dom inated by
,
non-domesticaled species
15 Rale of change from dom inance of
non-domesticated species to
domesticated species
16 Percentages of area dom inated by
non-domesticated species occurring
in patches greater than l.OODkm^
17 Percentage of area in strictly
protected status
Domesticated species diversity
18 Accessions of crops and livestock
in ex situ storage (num ber or per cent)
19 Accessions of crops regenerated in
the past decade (per cent)
20 Crops (livestock) grown as a percentage
of number 30 years before
21 Varieties of crops (livestock) grown as
a percentage of number 30 years before
22 Coefficient ol kinship or parentage of crops
Source; Reid el al. 1993
X
x
X
X
X
X
X
X
X
X
X
X
X
With .1c o iiip rc lic n siv e set of niulUpIc iiidiL,Uors .it llio ii disposal, it is iheii
li p to policy m akers anti planners to t lioosc' the right in d icato r to help .set
priorities for biodiversity co nservation M oioover. the ch oice ol indicators
should also depend on the se.ik- of ilte decision making, w lie th cr it is at
tfic local, notional or global level, as well as on w hether genetic, species oi
com m unity diversity is being assesse d (ReitI et al. 1993)
D evelo ping m ultitrle im lic n io rs Lo rep resent differe nt p rio ritie s for
biodiversity conservation ni.jy be one practical solution to the problem of
tfie lack o f scie tiLilic ag rcenrcru over a p n rctsc d e fin itio n an d m e asu re­
ment of biological diversity. It may also have som e merit in that, through
their ch o ice o f inclicators. cliffermit decisioti m akers leg non-govcrtim ental
c rg a n is a lio n s , s c ie n tis ts and ))o !ilie j;m s| will reveal th eir re sp e ctive
c iitn io n v o n what m attersin biodiversity co nservation. O nce revealed, such
o bjecttves and view s can tircn Ire open to public d ebate, and hopefully,
resolutioti into agreed and de arly stated fu io rtlics for co nservatio n.
However, there are several criticism s of this ap proacfr. The danger of
d e velo p in g differe n t in d ica to rs o f d iversity is th at u ltim a te ly tfiey may
co n fu se co n servatio n priorifir-s by being based on in h e ren tly in co m p ara­
ble a n d in c o n s is te n t m e a su re s o f biolo g ical d iversity. A s argued by
W eitzm an (1 9 9 2 an d 1995). we need to co m e up w ith 'a m o re-o r-less
co n s is te n t an d u sab le m easure of tlic v alu e o f d iv e rs ity ' - a 'value-ofd iv e is ily objective fu n ctio n ' - in order to reso lve real-w orld conservation
ch o ic e s. What is n eeded, llic n . is som e ide.i of the valu e of diversity as
o p p o se d to the v a lu e o f bitd o g ical re so u rce s. If a v a lu e of d iv e rsity
function c.in be m eaningfully p o stu laicd , then it ca n , at least in p rinci­
ple, Ix ' m ade co m m en su rate wtdi o ther b e n elrls and c o s ts , and so cie ty
w ill th ere fo re be a b le to d e te rm in e how m uch d iv e rs ity ought to be
p re se rv e d at the e x p e n se o f sa crificin g o th e r c h o ic e s o p e n to u s. A n
illu stration of the ap proach suggested by W eitzm an is show n in Box 5.1.
N e v e rth e le ss, a m ajo r stu m b lin g b lock to c o n s tru c tin g a valu e o f
diversity function is that su ch a function still p resum es that it is po ssible
to Com e up w ith a sin g le b io d iv e rsity in d ie.ito r. D e ve lo p m e n t of an
ih d icnto r for m e.isuring d iversity in itself im plies not on ly co n se n su s on ’
what we mean by diversity and how it should be m easured but also that
we agree on what it is .ib o u t biological diversity that we value. Even if we
are clo se to c o n se n su s on m easuring the d iversity o f an y given c o lle c ­
tion of bioiogiciil entities, we are far from agreem ent on w hat co n stitu te
the eco lo g ical and eco n o m ic im p licatio n s o f having m ore, as o p p o sed
to le ss, b io lo g ical d iversity. O n ce again, we a rc c o n fro n te d by th e
(jro b lc m that t f ir term lu o lo g ieal tllve rsity Is u se d a s a ca tc h -a ll for
d istin c tly different phenom ena - genetic, sp e c ie s and eco syste m diver­
sity. A s both e c o lo g ists an d e co n o m ists have p o in te d o u t. a n a ly sis of
the eco logical .and eco n om ic im plications o f Lriodiversity lo ss in term s of
Box 5.1 Weitzman's Value o f Diversity Function
The econom ist M artin W eitzman (1 9 9 2 and 1 9 9 5 ) has argued tha t, if any
biodiversity indicator is to be truly useful for policy purposes, then at some
p o in t it m ust be Iransfaled in fo a value o f diversity function. Ideally, this
function would show the increased benefits, or value, to society of an expected
increase in diversity, as measured by a suitable biodiversity indicator, However,
as the benefits of biodiversity are so difficu lt to quantify, the value of diversity
function could instead reflect qualitative choices, or rankings, of different biodi­
versity conservation options as to the increase in expected diversity (or the
avoidance of an expected loss in diversity), compared tO the am ount of conser­
vation expenditure required by each option. If such a value of diversity function
could be constructed, then it could, at least in principle, be made com m ensu­
rate w ith other benefits and costs, and society would therefore be able to
determine how much diversity ought to be preserved at the expense of sacri­
ficing other choices.
W eitzm an illustrates the correct use of a diversity in d ica to r w ith the
example of the operational criteria for determ ining preservation site priorities of
the US Nature Conservancy. Its m andate is to purchase land in order to
preserve rare or endangered species or natural.com m unities, which are ranked
by how rare they are as well as the number of site occurrences. These criteria
are used in turn to determ ine an overall biodiversity ranking of sites and lo
prioritize the acq uisition of sites. The resu lting biodiversity ranking system
gives a site a higher value if it contains more endangered species and/or if the
survival probability of those species is more greatly improved when the site is
preserved. According to Weitzman, the Nature Conservancy's ranking system
corresponds roughly to id entifyin g sites whose preservation w o uld cause a
relatively large change in expected diversity. Thus the expected diversity loss
per preservation dollar among species can be compared. A sim ilar approach
has been developed by Polasky et al (1 9 9 3 ) to compare the relative option
values of conserving species.
o n e of th e se levels o f biolog ical h ie ra rch y d o c s not n e c e ssa rily yield th e
sam e resu lts at a n o th e r level (Perrings et al, 1995).
However, even if we a re c o n c e rn e d w ith diversity at o n ly o n e level of
biological hierarch y - say, s p e c ie s d iv e rsity - and we agree o n a c o m m o n
m easu rem en t o f d iversity - say, th e g e n e tic d ifference a m o n g s p e c ie s d ete rm in in g a v a lu e of s p e c ie s d iv e rsity m ay still h a ve to b e m o d ifie d
depending o n th e p ro b lem u n d er c o n sid e ra tio n . That is, th e d iv e rsity a s
m easured by th e g en etic d iffe re n ce s b etw een sp e c ie s m ay h a v e a d iffer­
ent value to us d ep en d in g on w hat w e p e rce iv e to be th e e c o n o m ic and
e co lo g ica l im p lic a tio n s o f s p e c ie s d iv e r s ity for h u m an w e lfa re . T h is is
d e m o n stra te d in Box 5.2 w ith th e e x a m p le o f w ild a n d d o m e s t ic a t e d
g rasses in rang eland sy ste m s.
To su m m arize , the c u rre n t s c ie n tific d e b a te a b o u t b io lo g ica l d iv e r­
sity in d ica to rs
a p p e a rs to b e m oving in tw o d irectio n s. A lth o u g h th e re is
a' d iv erse range of in d ica to rs, b io d iv e rsity is still gen erally e q u a te d with
sp e cie s diversity. E v e n the d e v e lo p m e n t o f m ultiple in d ica to rs o f b iod i-
108
B lu e p rin t jo r
a S u s ta in a b le L’renoanf
Box 5 .2 W hat Value Diversity? The Example o f
D om esticated a n d W ild Grasses in Rangeland Systems
Perrings et al {19L)!3) use ttic follow ing example of w ild and dom estica te d
grasses in rangeland system s to argue how d ifferen t co nside ratio ns of the
ecological and e conom ic roles of these species can d eterm ine w he th er
increased species diversity is necessarily a good thing.
The w ild and dom esticated grasses found in rangeland systems are genet­
ically different, but depending on which of their uses we consider, they can be
viewed as either substitutes or complements - on the one hand, both grasses
can be alternatively used as fodder staples, and on the other, they both work
together to m aintain the ecological lunctiontng of rangeland systems and their
overall resilience (the a b ility of such systems to m aintain their functioning in
response lo externally imposed stresses and shocks). Because both w ild and
dom esticated species have sim ila r value in consum ption as fodder, there is
very little lost in the su b s titu tio n of dom esticated for w ild grasses, if we
consider the use of grasses (or fodder only, then there may be little additional
value to be gained from m aintaining the diversity of grasses in rangelands. In
contrast, both types of grasses are necessary for the maintenance of rangeland
ecosystem functioning and resilience. As a consequence, in term s of m aintain ­
ing diversity a mix of both grasses, is im portant. Focusing exclusively on the
fodder value and not the ecological role of wild grasses can lead to the conclu­
sion that diversity of grasses is not necessary in the rangeland system. Taking
into account the ecological role will lead to Ihe opposite conclusion.
versity le n d s to bo d o n iin a te d liy indices at d ie species level (see Table
5,1). E c o n o m is ts w h o a re in te re s te d in d e v e lo p in g a d iv e rs ity v a lu e
fu n c tio n m ore a p p ro j'ria te for p o licy use te n d to rely m a in ly on c o n v e n ­
tio n a l species diversity m easu res as th e basic b io d iv e rs ity in d ic a to r used
in such fu n ctio n s (see Rox ^ 11 In th e next sectio n w c take a clo ser look
a t in d ic a to rs o f s p e c ie s ric h n e s s a n d e x tin c tio n
as key e c o lo g ic a l
m easures for use in s u s ta in a b le d e v e lo p m e n t policy.
Hov-cver, th e re a rc o th e r eco n o m is ts and e co lo g is ts - th o s e asso ci­
a te d m a in ly w ith th e e c o lo g ic a l e c o n o m ic s s c h o o l (see C h a p te r 10) w h o a rc less h a p p y w ith th e c u rre n t s ta te o f b io d iv e rs ity in d ic a to rs .
A cco rd in g lo this view, n o t o n ly d o current in d ic a to rs a n d a ss essm en ts
o f b io d iv e rs ity s ta tu s te n d to focus p re d o m in a n tly o n s pecies d iversity
b ut they also ten d t i' e m p h a s iz e only certain c h a ra c te ris tic s o f species,
such as th e ir genciii. p ro p c itie s , th e ir re lativ e a b u n d a n c e acro ss sites,
th e ir e n d a n g e re d o r th r e a te n e d statu s, o r w h e th e r th e y a re w ild o r
d om c'sticated (eg see T ab le 5.1). Such chara cteristic s by th e m s elv e s tell
us very little a b o u t th e e co lo g ic al role of bio lo g ical diversity, th a t is the
ro le o f living organism s in u n d erp in n in g the fu n c tio n in g a n d resilien ce o f
e c o s y s te m s . It is th is ro le , a n d its im p lic a tio n s fo r h u m a n e c o n o m ic
a ctivity a n d w elfare, th a t m ust be analysed m o re closely if w e are to be
a b le to set m o re a p p ro p ria te b iodiversity c o n s e rv a tio n p rio rities, a n d o f
course sustainable d evelopm ent policies m ore generally. We retu rn to
this p o in t o f view in C hapter 10, and later in this chapter we exam ine the
use o f different concepts o f ecological resilience and sta b ility as im p o r­
tant indicators o f su stain ab ility
Species Richness and Extinction
Species diversity is usually defined as species richness, or the n um ber
o f species in a site o r h a b ita t (WCMC, i 992). M oreover, a lth o u g h the
loss o f b io log ica l d iv e rs ity may take m any form s, the e x tin c tio n of
species is usually taken to represent its m ost dram atic and irreversible
m ani/estation.
C on serva tion ists, in particular, have a lm ost inva ria bly tra n s la te d
biodiversity conservation in term s o f conserving species richness. This is
usually based on the rationale either th a t species have a right to exist or
that they have an a ctua l o r p o te n tia l econom ic b en efit to h um a n kin d
(lUCN et al, 1980 and 1991). However, conservationists have also been
quick to p o in t o u t th a t d ecline s in species and genetic d iv e rs ity are
clearly interrelated, C on tinu ing loss of species diversity - and certainly
species e x tin c tio n - Im plies a re d u c tio n in the overall p o o l o f global
genetic m aterial as well, w ith p ro fo u n d significance fo r b o th n atu ra l
evolutionary change and artificial selective breeding. M oreover, conser­
vationists argue, the loss o f b o th genetic and species diversity is m ainly
due to hum an a ctivities. It occurs b oth d irectly through o v e r-e x p lo ita ­
tion o f species and sub-species via hunting, collection and persecution,
and indirectly through the loss or m od ifica tio n o f habitats and ecosys­
tems. Conversion and a lteratio n o f hab itats and ecosystem s are by far
the most im p orta nt factors; consequently, conservationists have increas­
ingly called fo r the preservation o f spccies-rich habitats and ecosystems
as the basic strategy fo r biodiversity conservation (Ehrlich and Ehrlich,
1981 and 1992; McNeely e t ai, 1990; Myers, 1979; WWF, 1989),
Some econom ists, to o , have stated th e need for h a b ita t preserva­
tion to conserve endangered species. For example, more than fo rty years
ago, Ciriacy-Wantrup 11952} argued that, as a result o f species extinctio n,
future societies may discover th a t they have forgone significant benefits.
In order to avoid species e x tin c tio n and the co rre s p o n d in g loss in
benefits, then society today ought to preserve a m inimum viable p op ula ­
tio n o f the species and its required su p p o rtin g h a b ita t. This approach
was called the safe m inim um standard strategy for avoiding e xtinctio n in
day-to-day resource m anagem ent decisions. E xceptions w ou ld o ccu r
only when the costs o f avoiding extinction are 'intolerably large' o r that
o th e r social objectives m ust take precedence (see also Bishop. 19931.
However, as will be discussed fu rthe r in C hapter 10, in p ra c tic e any
I 10
F9n(7V7fil /urit
r.uiiiomii
a l t c m p i l o ntlopL ni onningful poi i oi c s I ws o d oji sii< h a str:i!cgy lins f l o u n ­
d e r e d pr e ci s e l y o n tlie p r o b l e m o f de f i ni ng ' i ntol er abl y kirge' . This is n o t
a n e a s y i s s u e l o r e s o l ve , a n d il is n ot siirii ri si ng t h a t t li e w i d e s p r e a d
im p l e m e n t a t io n of a safe m inim um st a n d a rd a p p r o a c h to avoiding
sf j eci es l os s h a s b e e n g e n e i a l l y a voi dei l , over c o n c e r n tfial llic c o s t s of
SLich a s t r a t e g y in t e r m s of tlie wel l - bei ng of c u r r e nt l i u m a n p o p u l a t i o n s
m a y h e e x t r e me l y higli.
T h e m o d e r n c o n s e r v a t i o n i s t a r g u m e n t for p r e s e r v i n g h a b i t a t s u s
m e a n s t o p r o t e c t i n g t h r e a t e n e d s p e c i e s a n d v a l u a b l e g e n e t i c ma t e r i a J
c o n t a i n e d wi t hi n tltem - o f t e n r ef e r r e d In a s in s ilii c o n s e r v a t i o n - h a s
c h a l l e n g e d t h e n o t i o n t h a t t h e u s e of z o o s , b o t an i c a l g a r d e n s , b r e e d i n g
p r o g r a m m e s , g e r m p l a s m I di ior at ori cs, g e n e or s e e d b a n k s a n d o t h e r
m e t l i o d s o f m a i n i a i n m g s p e c i e s a n d g e n e t i c s l o c k s a w a y f r om i h e i r
naturtil I mb i t a t s is sufficient for itiis p u r p o s e . Increasingly, s c i e n t i s t s h a v e
c o m e t o t h e s a m e c o n c l u s i o n . For e x a m p l e , Wei s s l n g e r ( ! 9 9 0 ) s t r e s s e s
t h e i m p o n . i n c c of c o n s e r v a t i o n t li rougi i gcrm[i l a. sm t e c h n o l o g i c s in
m a i n t a i n i n g g e n e t i c diversity, b u t h e a l s o a c k n o w l e d g e s t h a t s u c h
m e t l i o d s c a n n o t c o n s e r v e t h e w h o l e r a n g e of a n o r g a n i s m ' s di versit y:
r a t h e r t h e y p r e s e r v e a s a m p l e o f it. Moreover, t his s a m p l e is n e c e s s a r i l y
i n c o m p l e t e , it r e p r e s e n t s o nl y a p o r t i o n of llie p o p u l a t i o n a t t h e m o m e n t
of its e x t r a c t i o n . Similarly, in r evi ewi ng si mi l ar r e c e n t d e v e l o p m e n t s in
m a j o r c o n s e r v a t i o n e f f o r t s o v e r r e c e n t y e a r s , Wil son ( 19 92 ) m a i n t a i n s
t h a t t h e y m a y s a v e a lew s p e c i e s b e y o n d h o p e , b ut t h e m a j o r s o u r c e ol
b i o d i v e r s i t y , c o n s e r v a t i o n m u s i c o m e f r om p r e s e r v a t i o n of n a t u r a l
e c o s y s t e m s a n d l iabitats.
T h u s it is n o t s u r p r i s i n g t h a t m o s t b i od i v e r s i t y i n d i c a t o r s f o c u s
p r e d o m i n a n t l y o n s p e c i e s l o s s -- p a r t l y b e c a u s e o f t h e l i m i t a t i o n s o n
rlata, p a r t l y b e c a u s e b i o d i v e r s i t y h a s b e e n t r ad i t i o n a l l y e q u a t e d wi t h
s p e c i e s diversity, a n d partl y b e c a u s e m u c h a t t e n t i o n h a s b e e n f o c u s e d
o n s p e c i e s e x t i nc t i on a s a b a r o m e t e r of t h e h ea l t h o f g l obal biodiversity.
A i cc e r i l a n d c o m p r o h e n s i v e c o m p i l a t i o n o f g l o b a l b i o d i v e r si t y
s t a t u s . i n d t r e n d s h a s b e e n u n d e r t a k e n by tlie Wildlife C o n s e r v a t i o n
M o n i i o ' i n y C e n t r e IWOMC. 1992). Fol l owi ng e s t a b l i s h e d t r a d i t i o n , t h e
s t u d y q u a n t i f i es r a l e s o f s p e c i e s e x t i nc t i on t o pr ovi de t h e m o s t s t r a i g h t ­
f o r wa r d i n d i c a t o r o f b i o d i v e r s i t y s t a t u s . Hi s t o r i c a l d a t a o n a c t u a l
e x t i n c t i o n r a t e s ar c m o s t r e a d i l y a v a i l a b l e f or bi r ds, m a m m a l s a n d
r i iolluscs ( s e e Tabl e 5.21. D o c u m e n t e d i s l an d e x t i n c t i o n s b e g a n a l m o s t
t wo c e n t u r i e s b e f o r e c o n t i n e n t a l e x t i n c t i o n s . However , for all a n i m a l s ,
e x t i n c t i o n s i n c r e a s e d r apidl y f i om t h e early- or m i d - 1 9 t h c e n t u r y until
t he m i d - 2 0 i h century. Th e a p p . i r e n t de cl i ne in e x t i n c t i o n s s i n c e I 9 6 0 is
m o s t likely a t t r i bu t a b l e t o t h e i n c r e a s e in c o n s e r v a t i o n effort s.
E s t i m a t i n g r a t e s of l oss for h a b i t a t a n d e c o s y s t e m s is m u c h m o r e
difficult, tis e c o s y s t e m s a r e n ot easi l y d e l i n e a t e d a n d h a b i t a t a l t e r a t i o n
'
T a b le 5 .2 Historical Trends in Animal Extinctions
Period
Molluscs
1600-59
0
(% on islands)
Birds
Mammals
6
JOO
0
14
0
1660-1719
f% on islands)
0
1720-79
0
14
JOO
1
JOO
0
11
91
3
0
100
(% on islands)
1780-1839
(% on islands)
1840-99
(% on islands)
1900-59
f% on islands)
1960-
(% on islands)
No date
(% on islands)
Totals
(To on islands)
Other
Total
2
100
JOO
2
JOO
100
0
8
16
15
JOO
5
19
100
79
117
69
JOO
27
12
9
93
42
78
91
79
35
S3
15
33
46
52
175
7
19
44
61
61
13
69
71
5
60
37
54
30
83
1
JOO
22
9J
37
73
90
191
115
79
90
58
59
120
62
484
63
82
Source: WCMC, 1992
hard to define. Usually, fairly simplistic measures o f land use change are
employed. For example, the global expansion of land under crops, mainly
at the expense of forests and woodlands, between 1700 and 1980 is
shown in Table 5.3a. As indicated in Table 5.3b, the most rapid land use
change is currently the conversion o f forests in tropical regions.
Preliminary estimates from the United N ations Food and Agricultural
Organization (FAO) suggest that the annual area o f tropical deforesta­
tion during the 1980s was approximately 170,000 km^, or a rate o f
around 0,9 per cent of the total lost each year (FAO, 1991),
Tropical deforestation is considered a significant factor in global
biodiversity loss because the vast majority o f terrestrial species occur in
tropical moist forests. As a result, most predictions of global extinction
rates - as opposed to historical rates - are usually projected on the
basis of estimates o f species richness in tropical forests combined with
actual and projected deforestation trends. Table 5.4 summarizes some
of these recent estimates. As methods of estimation have improved, it
appears that predictions o f species loss have been revised downwards
somewhat. Nevertheless, even the most conservative calculations would
suggest a rate of species loss of 1 to 5 per cent per decade.
As noted in Table 5.4, and explained furtlier in Box 5.3, most projec­
tions o f species extinction are made using simple species-area
relationships. However, Lugo et al (1993) suggest that estimations of
T a b le 5,3 Hisloricaf Jremts in Land Use
A
Global Land Use, 1700-1980
Area
(10^ kmD
Vegetation types
Forests and
woodlands
Grasslands and
pasture
Croplands
B
C/;ar?ge 1700-1980
Percentage Area
fJO® kmD
1700
1850
1920
1950
1980
6215
5965
5578
5389
5053
-18.7
11.62
5860
265
6837
537
5748
913
6780
1170
6788
1.0
1501 + 456.4
0.72
12.36
Tropical Forest Area (lO^ km^), pre-1650-1990
Region
Pre1650
Central America
Latin America
Asia
Africa
12-18
12-18
640-97A
96-226
26501749
1750­
1849
30
40
100
170
176-216 596-606
24-80
16-42
JS501978
1980­
1990
200
637
1220
469
135
695
360
503
Note: Table A original source Richards, 1990; table B original source FAO (1991) (or
19 8 0 -9 0 and Williams (1990) for all other periods.
Source; WCMC, 1992
species loss based on p ro je c tio n s o f d e fo re s ta tio n th ro u g h sim p lifie d
species-area relatio n ships are misleading. In particular, such m odels fail
to take a ccount o f land use after forest clearing; they essentially assume
that such uses involve little or no species diversity, A lth ou g h substantial
species loss occurs due to forest clearing and degradation, certain land
m anagem ent p ra ctices, such as the e s ta b lis h m e n t o f p la n ta tio n s a n d
secondary forest, can restore a significant a m o u n t o f species diversity.
Thus the d e v e lo p m e n t o f b e tte r in d ic a to rs o f g lo b a l species ioss w ill
require fu rth e r research on the relationships betw een species d iversity
and forest clearance.
Resilience as a Measure of the Sustainability of
Ecosystems
A lth o u g h species e x tin c tio n is the m ost fu n d a m e n ta l a nd irrevers/b/e
m anifestation o f biodiversity loss, many ecologists believe th a t the m ore
p ro fo u n d im p lic a tio n o f such loss is fo r e c o lo g ic a l fu n c tio n in g and
resilience. As n oted in Chapter 2, by e cological fu n c tio n in g , ecologists
usually mean th o se basic processes o f e cosystem s, such as n u trie n t
cycling, biological productivity, hydrology, and se dim e n tatio n, as well as
the ability o f ecosvstcm s to support life, in turn, by ecological resilience.
T a b le 5 .4 Esiirmled Rales of Extinclion Based on Tropica! Deforeslalion
Estim ate
Percentage global
loss per decade
Method o f estimation
One million species
between 1975 and
2000
4
■ Extrapolation of past
exponentially increasing
trend
15-20% of species
between 1980 and
8-11
2000
*
R eferen ce
Myers
(1979)
Estimated species-area
Lovejoy
curve; forest loss based
(1980)
on global 200 0 projections
12% of plant species
in neotropics; 15% of
bird species in
Amazon Basin
NA
Species curve
U = 0.25)
Simberloff
(1986)
25% of species between
1985 and 2015
9
Loss of half the species
in area likely to be
deforested by 2015
Raven
(1988)
5-15% of forest
species by 2020
2 -5
,
Species-area curve (0.15
< z < 0.35); forest loss
assumed twice rate
projected for 198 0-85
Reid and
Miller
(1989)
0.2-0.3% per year
2-3
Species-area curve (low
z value); 1.8% forest
loss per year
Ehrlich and
Wilson
(1991)
2-8% loss between
1990 and 2015
1-5
Species-area curve (0.15
< z < 0.35): range
includes current rate of
forest loss and 50%
increase
Reid
(1992)
Source.- WCMC, 1992
e colog ists usually m ean th e c a p a c ity o f an e cosyste m to reco ver from
and thus a bso rb external shocks and stresses, w h e th e r th e y be n atu ra l
(eg d ro u g h t, fire, earthquakes) o r h u m an -in du ced (eg p o llu tio n , biom ass
rem oval).
M o s t e co lo g ists now believe th a t so m e m in im a l level o f b io lo g ic a l
dive rsity is necessary to m aintain e cological fu n c tio n in g and resilience,
w hich in tu rn are necessary fo r g en eratin g the b io lo g ic a l resources (eg
trees, fish, w ild life a nd crop s) a n d e c o lo g ic a l s e rv ic e s (eg w a te rs h e d
p ro te ctio n , clim a te s ta b iliz a tio n and erosion c o n tro l) on w hich e con om ic
a ctivity and hum an w elfare d epend. U nfortunately, it is d iffic u lt to d e te r­
m ine e x a c tly w h a t level o f b io d iv e rs ity loss is to le ra b le b e fo re th e
im pacts on hum an w elfare becom e severe, as th e precise im p a c ts o f the
toss o f b io d ive rsity in ecosystem s are d iffic u lt to p re d ic t. N evertheless,
many e co lo g ists w ou ld argue th a t th e m o s t im p o rta n t in d ic a to r o f the
inherent su sta in a b ility o f an ecosystem is n o t its loss o f b io d iv e rs ity per
se, b ut its c a p a city fo r re s ilie n c e in th e face o f e x te rn a lly im p o s e d
I 14
B liie p h iil [or a Susla ina b le Economy
Box 5 .3 L/s/ng Species-area Curves to Project
Species Extinctions
The basic ecological models used to evaluate the relationship between extinction
of species and deforestation reiy on islands biogeography theory (eg see Table
5,4), Estimations are generally derived from an assumed species-area relation­
ship. The typical relationships used is depicted in the equation where S is Ihe
number of species, A is the area of habitat and C is a parameter that depends on
the type ol species, its population density and the biogeographic region:
S = CA^
The shape of the species-area curve is determined by the exponential parame­
ter T, which is often referred to as the Z factor of the region or habitat. The
following figure shows how different values for Z will affect the estimates of
species loss attributed to deforestation, if the equation is used.
As the above relationships show, the higher the Z factor, the more species
are lost as a given area of habitat is converted or degraded. Most regions of the
world are characterized by Z factors of between 0.16 and 0.39. Islands tend to
have Z factors of about 0.35, whereas comparable continental areas have Z
factors of about 0.20. Z factors tend to increase as the area under considera­
tion becomes smaller. Unfortunately, our understanding of factors that affect
the value of Z is still incomplete. Nevertheless, as the above figure shows, for
low values of Z (< 0.20), the equation predicts that more than 50 per cent of
the land area can be deforested before the slope of the extinction curve rises
rapidly with increasing deforestation. Conversely, at high values, (> 0.60),
extinction rates are almost proportional to deforestation rates. Thus most
estimates of species extinction are highly sensitive to the assumed value of the
parameter Z (see Table 5.4).
Critics of this approach of using the equation above to estimate global
species loss maintain that this method grossly exaggerates the extent of such
loss. For example, Lugo et al (1993) demonstrate that limited bird and plant
data for the island of Puerto Rico indicate that the equation over-estimates
extinction rates even when Z values are extremely low [< 0.15), In particular,
this approach fails to take into account land use after deforestation, as it implic­
itly assumes that land is biotically sterile after forest clearance. Furthermore,
habitat diversity fs not accounted for in the species-area relationship, except in
the crude assumption that larger areas have more habitats. Finally, the equation
is based on the analysis of a single species, whilst it may be more useful to
look at assemblages of species in biodiversity loss.
To illustrate their points, the authors examine a case study from Puerto Rico
where plantations have been established on degraded lands when agricultural
activity is no longer possible due to poor soil productivity. Management practices
that facilitate natural successional processes and the development of species-rich
understories have enabled greater levels of biological diversity to prevail and may
serve as refuges for threatened species, a/fhougrt efforts to reestablish forest fand
use activities are unable to offset the full, and often irreversible, tosses of species
diversity resulting from the original forest conversion.
Source: Lugo et al. 1993
stresse s a n d sh ocks. For e xam ple, p re lim in a ry fie ld e x p e rim e n ts in v o lv ­
ing p ra irie grasslands have sh ow n th a t each a d d itio n a l s p e c ie s lo s t fro m
th e se e c o s y s te m s has a p ro g re s s iv e ly g re a te r im p a c t o n d ro u g h t re s is ­
ta n ce (T ilm an a nd D o w n in g , 1994; T ilm an et al, 1996).
H ow ever, as in th e ca se o f b io d iv e rs ity in d ic a to rs , a g re e m e n t o n h o w
to m ea sure th e re silie n c e o f e co syste m s is n o t u n a n im o u s . In p a rtic u la r,
th e re s ilie n c e o f a syste m has been in te rp re te d in tw o v e ry d iffe re n t w ays
in th e e c o lo g ic a l lite ra tu re . Each view has, in tu rn , d iffe re n t im p lic a tio n s
as to h o w re silie n ce s h o u ld be m easured.
A s in d ic a te d in Box 5.4, th e m o re tr a d itio n a l v ie w fo c u s e s o n
resilie n ce in th e c o n te x t o f th e e fficie n cy o f fu n c tio n . F ro m th is p e rs p e c ­
tive, re s ilie n c e can be e q u a te d m o re w ith e c o lo g ic a l s ta b ility , a n d ca n
e s s e n tia lly be m easured by s o m e key e co lo g ic a l in d ic a to r th a t re fle c ts th e
re sista n ce o f th e e n tire s y ste m o r o f a p a rtic u la r fu n c tio n o f th a t s y s te m
to an e x te rn a l d is tu rb a n c e . U n d e rly in g th is view is th e a s s u m p tio n th a t
th e n a tu ra l s ta te o f m o s t w e ll-fu n c tio n in g e c o s y s te m s is s o m e lo n g -ru n
o r c lim a x s te a d y -s ta te , a n d a n y e x te rn a l s tre s s o r s h o c k w ill e ffe c tiv e ly
d is tu rb th e syste m fro m th is e q u ilib riu m . A lte rn a tive ly, fo r s p e c ific b io lo g ­
ica l p o p u la tio n s o r e c o lo g ic a l fu n c tio n s th a t are s u b je c t to lo n g - te rm
p a tte rn s o f g ro w th o r c y c lic a l flux, th e c a p a c ity o f th e se p o p u la tio n s o r
fu n c tio n s to re tu rn to th e ir n o rm a l g ro w th o r flux p a tte rn s a fte r a d is tu r ­
b a n c e w o u ld be an in d ic a tio n o f th e ir e c o lo g ic a l s ta b ility , T hu s, th e
re s ilie n c e o r s ta b ility o f a p a rtic u la r e c o lo g ic a l fu n c tio n , a b io lo g ic a l
p o p u la tio n o r even th e w h o le ecosyste m lo an e x te rn a l d is tu rb a n c e can
be d e te rm in e d by m e a suring b o th th e resista nce to th e d e fle c tio n ca use d
by th e d is tu rb a n c e as w ell as th e sp e e d o f re c o v e ry to p re -d is tu rb a n c e
c o n d itio n s (Beeby, 1993: May, 1974: Pim m . I 984 a nd 1991),
H o w e ve r, as d e s c rib e d in Box 5.5, o th e r e c o lo g ic a l p e rs p e c tiv e s
fo cus o n re s ilie n c e in th e c o n te x t o f e x is te n c e o f fu n c tio n ; th a t is, th e
a m o u n t o f d is tu r b a n c e th a t ca n be s u s ta in e d a n d a b s o rb e d b e fo re a
ch a n g e in s y s te m c o n tr o l o r s tru c tu re o c c u rs (H o llin g , 1973 a n d 1986;
R o llin g e t al, 1995; Kay, 19 9 1). In c o n tra s t to th e tra d itio n a l v ie w o f d e fin ­
ing re s ilie n c e in te rm s o f an e c o lo g ic a l s te a d y s ta te , th is a lte r n a tiv e
p erspe ctive e m p ha sizes th e te n d e n c y o f e x te rn a l d is tu rb a n c e s lo a ffe c t
th e lo n g -te rm c y c le o f s u c c e s s io n a l p h a s e s o f an e c o s y s te m , c a u s in g
in s ta b ilitie s th a t can q u ic k ly flip th e s y s te m in to a n o th e r re g im e o f
b eh a vio u r (H o llin g e t al, 1995), In p a rticula r, th is view su g g e sts th a t th e re
is n o p e rm a n e n t o r e q u ilib r iu m s ta te o f an e c o s y s te m , b u t a d y n a m ic
flux o r c y c le o f e c o lo g ic a l p ro c e s s e s th a t c o n tr o l th e fu n c tio n in g a n d
s tru c tu re o f n a tu ra l e c o s y s te m s . A lth o u g h n a tu ra l o r in te rn a l p e r tu r b a ­
tio n s w ith in th e e c o s y s te m a id th e s e lo n g -te rm p ro c e s s e s , e x te rn a l
d is tu rb a n c e s can cause th e m to flu c tu a te w ild ly a n d d e s tru c tiv e ly . Thus
a re s ilie n t e c o s y s te m w ill be a b le to re tu rn to its n o r m a l d y n a m ic
16
Blueprint jo r a Sustainable E c o n m
Box 5.4 Ecosystem Resilience as ‘Efficiency o f Function'
or 'S tability'
The notion of ecological resilience as stability has been the traditional view in
ecology for some time (Beeby. 1993; May, 1974; Pimm, 1984 and 1991).
Essentially, stability means the ability of some key ecological indicator to resist
an external disturbance and return to its original state. As noted by Beeby (op
cil), the same principle can be applied to an individual, population, a commu­
nity, an ecological process or function, or even to the entire ecosystem. Stability
can also be classified according to the nature of the original state:
•
•
Homeostasis: the capacity to return to an original steady state after distur­
bance
Homeorhesis; the capacity lo return to an original trajectory or rate of
change after a disturbance.
The following figure illustrates the concept of ecological resilience as adjust­
ment stability:
Disturb,m rc
Source: adapted from Beeby, 1993
Resilience as E cological S ta b ility
The top half of the diagram shows how stability might apply to a key ecologi­
cal indicator, such as a biological population, that is in a steady-state
equilibrium over time. The fact that the population is constant may in turn be
a reflection of the overall steady state condition of the ecosystem The occur­
rence of an external event such as pollution disturbs the ecological equilibrium
of the system, which causes the population to fall. After some time, the popula­
tion may recover, thus indicating the ecosystem’s return to its previous
equilibrium state. As shown in the diagram, the resilience or adjustment stabil­
ity of the system can be determined by measuring the maximum size or
amplitude of the displacement to the ecological indicator caused by the distur­
bance, and by measuring Ihe speed of recovery or eJasticity of the indicator to
its pre-disturbance equilibrium. The bottom half of the diagram shows that the
same approach can be applied to an ecological indicator that is not in a steady
state initially, but instead shows a normal, long-run pattern of fluctuation,
cyclic behaviour, or in the example shown, growth.
110 Sustuinable DcvdopmenI: Ecological Approaches
1 17
processes of system control and functioning, but a fragile system will be
unable to recover and thus be transformed permanently.
Some natural disturbances, such as events triggered by fire, wind and
herbivores, are an inherent part of the internal dynamics of ecosystems
and in many cases set the timing of successional cycles (Holling et al,
1995). Hence, these natural perturbations are part of ecosystem develop­
ment and evolution, and seem to be crucial for ecosystem resilience and
integrity [Costanza et al, 1993). If they are not allowed to enter the ecosys­
tem, it will become even more vulnerable to external disturbances, and
thereby even larger perturbations will be invited with the risk of massive
and widespread destruction. For example, small fires in a forest ecosystem
release nutrients stored in the trees and support a spurt of new growth
without destroying all the old growth. Subsystems in the forest are affected
but the forest remains. If small fires are blocked out from a forest ecosys­
tem. forest biomass will build up to high levels and when the fire does
come it will wipe out the whole forest. Such events may flip the system to
a totally new system that will not generate the same level of ecological
functions and services as before. This was the case in the recent manage­
ment of the Yellowstone Nalional Park in the US. which was severely
destroyed by a fire that was allowed to burn naturally although the system
had lost its own natural function of fire control.
Although intellectually appealing, it is very difficult to construct a
policy-relevant indicator of ecological resilience based on the interpreta­
tion of the concept as put forward by Holling and others. Not
surprisingly, this has led many ecologists to recommend a more tradi­
tional measure of resilience, such as the speed of recovery indicator
suggested by Pimm, as a preferred indicator - even though the latter
may be an oversimplification of what ecological resilience implies in
terms of the sustainability of ecosystems. Stilt others suggest that, since
there is a link between the biological diversity of an ecosystem and its
resilience, then perhaps focusing on various biodiversity indicators
remains the best way of measuring the overall health of an ecosystem,
including its capacity to recover from external stresses and shocks.
Resilience and the Sustainability of Agro-ecosystems
Some ecologists have suggested that the concept of ecological resilience
can be more usefully applied as an indicator of sustainability in the case
of managed or human-modified ecosystems, such as agro-ecosystems.
These latter systems are essentially ecosystems lhal have been deliber­
ately modified or managed by humans in order to produce one or more
outputs or products that have an economic value. Examples include
agricultural systems, timber plantations and managed forestry systems,
18
B litc p r in I fo r a S u sta in a O lc Econom ti
Box 5 .5 Ecological Resilience as ‘Existence o f F u n ctio n ’
Hofling (1 9 8 6 ) has described ecosystem behaviour as the dynam ic sequential
interaction between four system phases or sequences: exploitation, conserva­
tion, release and reorganisation. The first two phases are sim ilar to ecological
succession, w hich ecologists have traditionally defined as the developm ent of
ecosystem s from colonization lo m ature or so-called clim ax stages (O dum ,
1 9 6 9 ). E xploitation is represented by those ecosystem processes th a t are
responsib/e for rapid colonization of disturbed ecosystems during w h ic h the
species capture easily accessible resources. C onservation occurs w hen the
slow resource accum ulation takes place in the ecosystem that builds and stores
increasingly complex structures the characteristic features of the climax stage
of an ecosystem. Connectedness and stability in the ecosystem increase during
the slow sequence from exploitation to conservation and a capital of nutrients
and biom ass is slow ly accum ulated. The next sequence is that of release or
creative d estruction, ft takes place w hen the co nse rva tion phase has b u ilt
elaborate and tig htly bound structures that have become over-connected so
that a rapid change can be triggered easily. The stored capital is then suddenly
released and the tig ht organization is lost. The a brup t destruction is created
T h e Four E co system Phnscs o f th e N a tu ra l Succession C ycle
Notes: The arrows show the speed of flow in the ecosystem cycle, where arrows
close to each other indicate a rapidly changing situation and arrows far from each
other indicate a siowty changing situation. The cycle reflects changes in two
attributes;
(i) the Y axis: the amount of accumulated biological capital’ {nutrients, carbon)
stored in the current system as it progresses through its phases and (ii) the X
axis: tlie degree o( connectedness among the various components of the biological
capital
The exit from the cycle indicated a! the left of the figure indicates the stage
where, in response to an external disturbance, the system could flip into a differ­
ent type of system, which could be more or less productive and organized than
the previous one.
Source; Ffolling, 1986 and Hoifing et at, 1995
internally but caused by an external disturbance such as hre, disease, or graz­
ing pressure. This process of change both destroys and releases opportunity for
the fourth stage, reorganization, where released materials are mobilized to
become available for the next exploitative phase.
The figure above, constructed by HoHing, depicts the interrelationship
between these four system phases, which describe the inherent succession cycle
of a natural ecosystem. The stability and productivity of the system is determined
by the slow exp/ottalion and conservation sequence. Resilience, that is the
system's capacity to recover after a perturbation (disturbance), is determined by
the effectiveness of the last two system phases, which essentially should act as
macro-regulatory functions in response to an external'disturbance. Some natural
disturbances, such as events triggered by fire, wind and herbivores, are an inher­
ent part of the internal dynamics of ecosystems and may actually reinforce
ecosystem resilience and integrity (Holling et al, 1995; Costanza et al, 1993), If
they are not allowed to enter the ecosystem, it will become even more over­
connected and thereby even larger perturbations will be invited with the risk of
massive and widespread destruction. Human-induced disturbances, such as
over-exploitation, degradation, pollution and habitat destruction, tend to under­
mine the resilience and integrity of an ecosystem, thus causing the system to flip
or transform. This transformed system is likely to be less organized and produc­
tive, and hence less resilient, thus making it even more prone to de-stabilization
in the face of further human-induced disturbances.
fish ponds and aquaculture, and livestock rangeland systems. As the
structure and control processes of these systems have been deliberately
modified to be productive in terms o f an economically valued output or
outputs, then the ability of these systems to recover from disturbances
essentially amounts to their ability to sustain their levels o f productivity
in the face of such stresses and shocks.
This view of resilience, or sustainability has been d evelo p ed by
Conway (1987) in examining the key properties o f agricultural systems or more appropriately agro-ecosystems. As noted, Conway suggests that
the most valued feature or property of an agro-ecosystem is its produc­
tivity. or yield, the am ount o f valued output per unit o f resource input.
For example, productivity can be measured in purely physical terms,
such as kilograms per hectare, or in monetary terms, such as gross or
net crop incom e per hectare, Alternatively, both m easures could be
expressed in terms o f an input o th e r than land, such as kilograms o f
nitrogenous fertilizer or hours o f employed labour.
The key to Conway's approach is the distin ctio n betw een the
sustainability of production in the agroecosystem and its stability.
Analogous lo ecological resilience, sustainability is defined by
Conway as the ability of an agro-ecosy.stem to maintain productivity when
subject to an external stress or shock. Keeping in mind that agro-ecosys­
tems function both as ecologica! systems influenced by natural
processes, and as hum an-directed production systems influenced by
120
B lu e p rin I fo r a Su sta in a b le Econotm j
econom ic ;tiid social processes, then agro-ccosystenis may be sub|ecl to
a range o f possible stresses and shocks from ecological, eco n o m ic and
social sources. Thus, in this context, a stress could be defined as a regular,
som etim es con tin u o us but relatively small and p redictab le disturbance,
and could inclu d e such diverse influences on an agro-ecosystem as the
effect o f salinity, toxicity, erosion, declining m arket dem and or in d eb ted ­
ness. O n th e o th e r hand, ti shock w o u ld be an irregular, in fre q u e n t,
relatively large and unpredictable disturbance, which could include a rare
drought or flood, a new post, or an unexpected rise in input prices (eg a
doubling o f labour costs due to a shortage of workers).
In c o n tra s t. C onw ay defines s ta b ility as th e d eg re e to w hich th e
productivity o f an agro-ecosystem rem ains con stan t in the face o f small,
norm al flu c tu a tio n s and cycles in th e surro un d in g e n v iro n m e n t. Such
influences m ig h t in clu d e the e xp ec ted changes in clim atic o r seasonal
c o n d itio n s , o r flu c tu a tio n s in th e m a rk e t d e m a n d
products.
for a g ric u ltu ra l
Figure 5.1 illu strate s th e basic d is tin c tio n b e tw e e n s ta b ility and
sustainability, As b o tli properties arc defined in le rm s o f im p acts on the
productivity o f an agro-ecosyslem over tim e, both are inherently m easu r­
able. For e x a m p le , assum e that p ro d u c tiv ity is m e as u red in term s o f
kilograms o f c ro p o u tp u t per hectare. As shown in the figure, if an ag ro ­
e co system is highly s u s tain a b le, th e n a fte r th e in itia l im p a c t o f a
lo n g -te rm stress o r s h o rt-te rm sho ck, tlie p ro d u c tiv ity o f th e system
should recover fairly rapidly to its lo n g -term trend o ver tim e. If the agro­
ecosystem is unsustainable, then its p ro d u ctivity is unlikely to recover
from a stress or shock, and thus yields will rem ain c o n s id erab ly lo w er
than previously. In com parison, stability can be m easured by th e degree
o f s h o rt-te rm flu c tu a tio n in o u tp u t p er h e c ta re in c o m p a ris o n to th e
long- run tre n d ra te o f productivity. Thus an a g ro -e co sy s te m w ith low
stability will be p ro n e to large fluctuations in s h o rt-te rm yields, whereas
in a highly stable system short-term yields wilt hardly diverge from longrun pro du ctivity trends.
The final agro-ecosystem p ro p erty of in terest to C onw ay is equity, '
which he defines as the evenness o f distribu tio n o f the p ro d u ct am ong
the beneficiaries o f an agro-ecosystem . D ep en ding on the scale o f the
agro-ecosystem , th e beneficiaries m ight be the farm household, village,
or the w hole p o p u latio n of a rural region o r n atio n . Thus a high level o f
equ ity w o u ld suggest th a t the o u tp u t o f an a g ro -e c o s y s te m is fairly
evenly d is trib u te d a m o n g its b en e ficia rie s, w h ereas in an in e q u ita b le
system only a few beneficiaries gain from the o u tp u t.
C onw ay has used these four p ro fie rlie s to c h a ra c te riz e d iffe re n t
agro-ecosystem s across the world. In particular, this approach has facil­
itated assessm ent o f how agricultural and rural eco n o m ic d ev elo p m en t
ivicujuiiMj/
ou itu in u v ie uevew pm eni: cw iogicai /\pproacnes
12 1
Source; Adapted from Conway, 1987; Conway and Barbier, 1990
Figure 5 . 1 Conway'i Distinction between Sustainabiiily and Stabifily
in an Agro-ecosystem
may have affected the various trade-offs between, on the one hand,
improved productivity of an agro-ecosystem, and on the other, declining
stability, sustainability and equity. Such an assessment has been useful
In explaining why the green revolution in developing countries may have
been extremely successful in improving cereal yields on favourable
agricultural lands and for farmers who are able to obtain the comple­
mentary input packages o f high-yielding seed varieties, fertilizers and
pesticides, it has been less successfully transferred onto marginal,
rainfed lands which have poorer quality soils, erratic rainfall and often
Steeper slopes, and where poor farming households cannot afford the
necessary inputs nor land improvernent investments to improve their
farming systems (Conway and Barbier, 1990; see also Box 5.6|. As has
been pointed out, the type of agricultural monoculture that results from
green revolution technology is a highly vulnerable system with rnany
similarities to a highly stressed natural ecosystem (Table 5.4),
Ecological Carrying Capacity
A long-standing concept in ecology has been the notion of carrying
capacity, which can be generally defined as the maximum number (or
density) of individuals of a species that an ecosystem will sustain (Beeby,
1993). The existence of a carrying capacity for every species suggests
that no living population can grow forever. Competition between species
for space, food and other resources imposes a natural lim it on the
number of individuals of a population that any ecosystem or habitat can
support. Thus the availability of limited resources is dependent on the
122
Blueprint for a
Sus/a/Mtif’/r Emnomi/
Box 5 .6 The Four Agro-ecosystem Properties and
Agricultural Development
Conway has used his approach of cliaracterizing agro-ecosysfems into (heir
four key properties of productivity, sustainability, stability and eiquity in order
to compare and contrast the effects of green revolution intensive monoculture
and other forms of agricultural development at the farming system level across
developing regions, especially in Asia. In particular, Conway (1983) notes that
it is possible to view agricultural development in Asia as a progression of
changes in the relative values of these four agro-ecosystem properties. The
table below is a summary of the four contrasting generic agro-ecosystems
found in Asia.
Agricultural D evelopm ent in Asia .is a Function o f
Agro-ecosystem Properties
Productivity Stability Sustainability Equity
Shifting cultivation
Traditional croppingsystem
Improved rice 1 (IRS)
Improved rice II (IR36, IR42)
Low
Medium
High
High
Low
Medium
Low
High
High
High
Low
,Low
High
Medium
Low
Medium
Sourc':: adapted from Conway, 1993
Shifting cultivation systems in Asia are characterized by low productivity and
stability blit generally display high sustainability and equity. Traditional seden­
tary cultivation systems such as the cultivation of a local rice variety folfowed
by soybean tend to be more productive and stable and are still highly sustain­
able, although possibly less equitable. However, the introduction of rice
monocultures in Asia has caused a major change in rice agro-ecosystems. The
initial phase of the green revolution with the introduction of the first
International Rice Research Institute high-yielding rice varieties, such as IRS
and similar hybrids, led to substantial improvements in productivity. However,
yields fluctuated widely, and the sustainability of the monocultures have been
affected by (he growing problem of pest and disease attacks. Problems with
equity of distribution were also severe. The more recent varieties such as IR36
and IR42 and similar hybrids combine high productivity with better stability,
particularly in variable rainfall conditions, and thus more widespread distribu­
tion across rice farmers, but susceptibility to pest and disease remains a
persistent problem (Conway and Barbier. 1990).
number or dem;ity of a biological population, and in turn, these densitydependent factors wiJJ restrict the population to the carrying capacity
limit of its natural environment.
The concept o f carrying capacity, or a maximum size of a popula­
tion. is widely used to determine growth rates for individual populations
and communities in ecological models of population dynamics and in
economic models of biological-resource harvesting (May, 1981; Clark.
1976) Those models in turn have led to a ereatcr understanding of the
M ru su riiig SuslaiittiOle D evf/opw ciit: E io h i/ic a i Approaches
I 23
eco lo g ical a n d e c o n o m ic co n d itio n s in flu en cin g the e xp Jo iiaiin n o f
b iological p o p u la tio n s , p re d a to r-p re y re la tio n s h ip s , h ab itat rt '->ource
interactions, and so forth.
H ow ever, carrying c a p ac ity has also b ee n used m ore d ire c tly by
ecologists as a m eans to inffuence conservation policy objectives. These
approaches range from em ploying carrying capacity in a more c o n v e n ­
tional way as a means to selecting key natural habitats and wild areas for
p re se rva tio n, or a lte rn a tiv e ly exp an d in g th e c o n c e p t to look a l the
resource d em an d s and to ta l ecological Im pacts of hum an populations.
We have already seen how the co n c ep t o f species diversity can be
tran s late d in to an in d ic a to r for e n v iro n m e n ta l policy, for e xa m p le by
being used as th e basis for selecting p re se rva tio n sites (see Box 5.1).
Carrying cap acity has b een used in a sim ilar way to d ete rm in e h a b ita t
conservation priorities.
If carrying c a p a c ity reflects the n atu ra l lim it to a species, then it
should also represent the minim um natural h ab itat required by a species
in order to g uarantee its'survival. Thus, e stim a tin g the habitat re q u ire­
ments o f an endangered or threatened sf^ecies through som e m easure
of carrying capacity may be an im portant in d icato r in decidittg priorities
for the estab lish m e n t o f nature reserves, preservatio n areas and o th e r
species con s erv a tio n goals. This may be p artic u la rly useful w here the
threaten ed species or groups o f species are a ssociated w ith a un iq u e
and clearly id entifiab le natural habitat.
As n o te d by B eeby (1 9 9 3 ), devising h a b ita t in d ic ato rs based on
carrying capacity has had an instrumental role in influencing the choice
o f w etlan d p re se rva tio n sites for bird species in N o rth A m erica and
Europe. Prioritizing w etlands habitat through estim ating carrying capac­
ity of key w etland species is a prom inent feature of the h ab itat evaluation
procedure d evelo ped by the US Fish and W ildlife Service. The first step
in the procedure is to group various species in to guilds, which consists
of those species w ith m ore o r less the sam e resource requirem ents and
roughly the sam e role in w ider community, For exam ple, one guild m ay
include all nectar-feeding insects; however, n ectar and fruit-feeding large
birds wouid com prise a separate guild. For each guild, a representative
or indicator species is chosen, and for that species, measures of h ab itat
area are used in conjunction with a habitat suitabiJity index to d eterm in e
an estim ate o f the carrying capacity. The evaluation procedure not only
facilitates the selection o f critical wetland habitats for preservation, but
can also be used as an indicator of the effect of various possible hum an
impacts in term s of the likely reductions in carrying capacity, and thus
key species habitats.
Perhaps the m ost a m b itio u s a tte m p t to d e v e lo p tiie eco lo g ical
concept o f carrying capacity as a major policy in d icato r was the study by
.
124
B lu e p rin t for a S u sta in a b le Fronom u
the FACJ to d e te rm in e the h u m .iii p o p u ltu io n carrying capacity o f land
and food resources across I 17 developing nations {FAO, 1984). The basic
biophysical data for llic study consisted o f the d etailed FAO soil maps,
classifying tlie worid by soil, terrain and bedrock form atio n , c o m b in e d
w ith a groclim atic data from th e FAO Agroccological Z o n e Project, which
classifies th e world by rainfall, radiation, tem perature, length of growing
p erio d a n d o th e r critical agroclim atic d ata . Based on these m aps, the
study was ab le to d cto rm in i' th e particular foo d crop that would provide
the g re ates t a m o u n t o f p rotein and calories for each lan d/clim ate unit,
thus yielding a rough e stim a te o f the m axim um food producing c a p a b il­
ity o f each develo ping country. The theoretical carrying capacity o f each
c o u n try was th e n c alc u la te d by divid in g each n a tio n ’s to ta l p o te n tia l
calorie p ro d u ctio n by the FAO's m inim um daily calorie requirem ent per
c a p ita , th u s e s tim a tin g the n u m b e r o f p e o p le that th e c o u n try c o u ld
h y p o th e tic a lly su p p o rt. This p o te n tia l p o p u la tio n -s u p p o rtin g c ap ac ity
was then divid ed by the actual 1975 p o p ulatio n o f each country and the
p roji-cted p o p u latio n in 2000.
A lth o u g h the overall results were encouraging - the developing world
a p p e a rs to be able to s up p o rt twice its 1975 p o p u la tio n even a t low input levels - the country-by-country results were less o ptim istic. A t the
1975 lo w -in p u t level, 55 countries were considered critical (ie showed a
c arryin g c a p a c ity ra tio o f
I I o r less), w hereas 64 c o u n trie s w ere
p ro je c te d to be critical by 2 0 0 0 , including th e e n tire region o f S o u th ­
West Asia.
T lic FAO stu dy lias been follo w ed in recen t years by a v a rie ty o f
sim ila r a ss essm en ts of p o ic n tia l global fo o d security th a t use fu rth e r
w ork a n d d a ta from th e A g ro ec o lo g ica l Z o n e P roject c o m b in e d w ith
recent UN p o p u latio n and food dem and projections (Penning d e Vries et
al, 1997: S iv a k u m a r a n d V alen tin , 1997). A lth o u g h the te rm 'carrying
c a p a c ity ' is n o t explicitly used by these assessm ents, the basis o f the
m e th o d o lo g y is essentially the same as before, which is to use available
b io p h y s ic a l a n d a gro e co lo g ic a l d ata
for d iffe re n t glo b al zones to
e s tim a te tlie a m o u n t-o f p la n t biom ass req u ired to feed the fu tu re
p o p u la tio n s in m ajor regions o f th e w orld, a n d to c o m p a re th e results
w ith th e a m o u n t o f fo o d that could be p ro d u ce d sustain ab ly from an
a g ro e c o lo g ic a l a n d tech n ical p ersp ective. T h e results for d e v e lo p in g
c o u n trie s a re sim ilar to th o s e ach ieved by the previous FAO study.
.Although th e foo d producing carrying cap acity is still a m p le in C en tral
and S o u th A m e ric a . C en tral Africa and O c e a n ia , th ro u g h o u t m uch o f
Asia th e ra tio o f ]io ten tial food supply to [iro jccied food dem and is likely
lo be critical (Penning dc Vries, op cit).
A lth o u g h c arry in g -c a p a c ity studies of these kinds p ro vide p o te n hallv u seful in d ic ato rs for p ro je ctin g glo b al a n d regional food supply.
‘
Measiiring Suslatnable Developmcitl: Ecological Approaches
125
such studies in themselves are not sufficient to predict global food
prospects accurately, as they ignore the ability o f various populations to
import and export food and to adopt new technologies for crop improve­
ments. A recent analysis o f the global food situation conducted by the
International Food Policy Research Institute (IFPRII has concluded that,
during the next 25 years, the world will produce enough food to meet
the demand o f people who can afford to buy it, and real food prices will
continue to decline (Pinstrup-Andersen et ai. 1997). In contrast to the
carrying-capacity studies, the IFPRi projections suggest that food
security within tire rapidly growing Asian countries should not be a major
problem, as these countries should have sufficient foreign currency
reserves to finance their growing food gap - the difference between
domestic production and demand for food. Instead the main concern is
with many low-income countries, including sub-Saharan Africa, which
may not be able to generate the necessary foreign exchange to purchase
all their food needs on the world market. In addition, many poor people
within these countries will not be ib ie to afford food purchases to meet
their subsistence needs.
Despite the obvious limitations of carrying-capacity concepts as a
guide to policy making, they continue to be explored in the ecological
literature. For example, some ecologists have argued that the true
ecological carrying capacity required to support human populations is
not simply the land and agroecoIogicaJ resources needed to meet food
demand. Because human populations live in advanced economic
systems that employ sophisticated technological means to generate a
variety o f production processes and commodities, and thus require
abundant resources and produce substantial waste products, the total
ecological impact of modern-day human livelihoods is substantial. Thus
these ecologists maintain that actual human carrying capacity;
■fflust be hnerprelcd as the maximum rate of resource consu/nplioii
and waste discharge that can be sustained indefinitely witfioul
progressively impairing Ihe functional integrity and productivity of
relevant ecosystems wherever the latter might be.' (R«s and
Wackemagel. 1994)
Although directly measuring human carrying capacity is extremely diffi-'
cult, recent efforts have focused on providing an approximate indicator
by estimating the ecological footprint associated with major consump­
tion activities (see Box 5.7). The basic approach is to determine the
equivalent land area required to sustain the current consumption of key
commodities by a population of a given region. As indicated in the Box,
recent estimates of the ecological footprint of food, enerev and forest
■
I 26
Bluepnnl jor a busfainaOlc Ecoiionui
Box 5 .7 Total Ecological Im pact and E cological Footprint
Tt>p concept of an ecological Inntprtnt is concerneti with determining how m nrii
pioduclive land and water area in various ecosystems is required to support a
region's human population indefinitely at current consum ption levels. This
approach essentially inverts traditional carrying-capacity measures that are
concerned with the maxinmm size of population that a given ecological region
can sustain indefinitely.
Related to the ecological footprint concept is the notion of total ecological
impact - the total iium an impact on ecosystems of the resource degradation
and pollution caused by human production and consumption activities. Usually,
ecologists have devised fairly straightforward measures of total ecologicai
impact. For example. Hardin (19 91 ) has suggested the following formula:
Total human impact on the ecosphere = (population) x (per-capita impact)
Similarly, it Ims been suggested that human ecological impact is the product of
population, affluence (per-capita consumption levels) and population (Ehrlich
and Holdren, 1971; Hofdren and Ehrlich, 1974);
Total human im pact on Ihe ecosphere = (population) x (per-capita
consumption) x (technology)
The problem w ith such formulae is that some of the key variables (eg per
capita impact and technology) are d ilficu lt lo determ ine and are open lo
subjective interpretation, and the impacts associated w ith the resource
demands and waste generation may vary across every type of human produc­
tion and consumption activity.
The ecological footprint approach attempts to overcome this problem by
determining the effective land requirements of several major types of commodi­
ties for a given human population, and then aggregating these land
requirements to determine the total area required lo maintain any given popula­
tion. The major com m odities that are generally investigated through this
approach are food, energy, forest products and specific waste by-products.
Typically, such ecological footprint calculations show that populations in devel­
oped regions of the world, plus urban populations more generally, consume
much more land (and hence ecological resources) than that contained within
the actual geographical area that the population inhabits.
For example, Rees (19 92 ) and Rees and Wackernagel (19 94 ) have calcu­
lated the total forested and arable land requirements for the current populationof the Vancouver-Lower Fraser Valley region of Brrtish Columbia, Canada, in
terms of consumption of domestic food, forest products and fossil energy. Tn
support just their food and fossil fuel consumption, the authors estimate that
the region's population of 1.7 million requires 8.7 million tiectares of land. An
additional 0 .85 million hectares is required to sustain the population's forestproduct consumption. As Ihe total area of the region is only about 4 0 0 ,0 0 0
hectares, the ecological footprint of the population living in this region is at
least 22 times the actual area that they occupy. The authors report sim ilar
findings for other developed regions. For example, the Netherlands is estimated
to have an ecological faotprint that is 14 times its geographical area - approx­
im ately 11 m illion hectares for food and forestry products and 3 6 m illion
hectares for fossil fuel.
product consum ption of the pop ulatio n of the V an couver-Low er Valley
Region o f British Colum bia, Canada, suggest that th e region effectively
imports a productive carrying capacity for these products that is 22 tim es
that o f the actual area inhabited by the population. For the N etherlands,
(he e c o lo g ic a l fo o tp rin t fo r th e s e s a m e com m odities is 14 tim es the size
of the cou n try (Rees, 1992; Rees and Wackernagel, 1994).
In g en eral, m ost ecological fo o tp rin t studies have reach ed sim ilar
conclusions, nam ely that populations in d eveloped regions and urbanbased p o p u latio n s consum e much m ore land^ and thus have a greater
ecological im p act, than the actual area that they inhabit. Effectively, this
means th a t such populations im port m uch m ore carrying capacity than
they currently occupy, which suggests that the ecological im p act o f their
production and consum ption activities are substantial.
How ever, it is unclear w hat a d d itio n a l c o n trib u tio n th e eco lo g ical
footprint literatu re is making to our overall understanding o f sustainable
d e v e lo p m e n t. A t m ost, the approaches ad vo cated sim ply a c c o u n t for
the a m o u n t o f resource use occurring in a given location. If this leads to
a policy recom m en d atio n that resource use per person is to o high and
therefore m ust be lowered, it is unclear w hat is new in such an approach.
Unlike o th e r ecological app ro ach es, the ecological fo o tp rin t lite ratu re
appears to o ffe r no insights in to the key su stain ab ility issues th a t we
must resolve, such as the role o f natural capital in sustaining econom ic
and e co lo g ic al system s and the d egree to which such e n v iro n m e n ta l
goods and services can be s u b s titu ted for by o th e r e c o n o m ic assets,
such as hum an and physical capital.
Conclusions
Ecologists have d eveloped several im p o rta n t in dicators to reflect the
ability o f n atu ra l and hum an m o d ified ecosystem s to sustain hum an
activity. Given the im portant role that many ecologists ascribe to b io d i­
versity in m aintaining the functioning and integrity o f ecological systems,
it is not surprising that much work has focused recently on measures o f
species diversity and richnc.ss as key indicators of ecological health.
Another im portant contribution o f ecology has been to im prove our
understanding o f th e ab ility o f ecosystem s to recover from e xtern a l
disturbances, especially h u m a n -in d u c e d im pacts such as p o llu tio n ,
resource exp lo itatio n and environm ental degradation. Thus the ecologi­
cal notions of stability and resilience are probably the closest ecologists
come to devising an ecological concept o f sustainability, D esp ite som e
disagreem ent o ve r these c o n c ep ts in th e eco lo g ical lite ra tu re , som e
economists and ecologists have found the notion o f ecological thresh­
olds, s ta b ility and resilience to be extrem ely useful In analysing th e
ecological sustainability of various econom ic activities (see C h ap ter 10).
I 28
B/i(cprinl for a Stistauiooir h.cononitj
A s n o ’ c d in t h is c h a p t e r , th is c o n c e p t c a n b e a p p li e d b o t h t o n a t u r a l
s y s te m s ,
such
a s p r is t i n e o ld - g r o w t h
fo re s ts , a n d
h u m a n -m o d ifie d
p r o d u c t io n s y s te m s , s u c h a s a g r ic u ltu ra l s y s te m s .
F in a lly , e c o lo g is t s h a v e a ls o s u g g e s te d d if f e r e n t in t e r p r e t a t i o n s o f
t h e c o n c e p t o f c a rry in g c a p a c ity a s a m e a n s t o d e t e r m in in g th e e c o lo g i­
c a l s u s t a in a b ilit y o f h u m a n p o p u la t io n a n d a c t iv itie s , in d ic a t o r s b a s e d
o n c a rry in g c a p a c it y a rc r o u tin e ly u s e d as a g u id e fo r p r io r it iz in g h a b it a t
s ite s a n d n a t u r a l a r e a s fo r c o n s e r v a tio n . H o w e v e r , a s d is c u s s e d in th is
c h a p te r , s u c h a p p r o a c h e s re m a in c r u d e in s t r u m e n t s fo r p o lic y , a s th e y
r o u t in e ly ig n o r e t h e b e n e f i t s a n d c o s t s a s s o c ia t e d w it h c o n s e r v a t io n .
A lt h o u g h it is c la i m e d t h a t t h e c o n c e p t o f c a r r y in g c a p a c it y c a n a ls o
b e e n d e v e l o p e d m o r e d ir e c tly in t o e c o lo g ic a l s u s t a in a b ilit y in d ic a t o r s s u c h as t o t a l r e s o u r c e d e m a n d s o f h u m a n p o p u la t io n s a n d tfrc ir e c o lo g ­
ic a l f o o t p r i n t s in le r m s o f t o t a l la n d r e q u i r e m e n t s t o s u p p o r t c u r r e n t
p r o d u c t io n a n d c o n s u m p t io n a c t iv itie s - s u c h in d ic a t o r s s h e d v e ry little
light o n (h o a c t u a l v a lu e o ( e co '-iy s te m g o o d s .m ci s e rv ic e s .in d th u s h a v e
v e ry lim it e d r c le v .m c c to p ra c tic a l p o lic y m a k in g
E c o lo g ic a l
a p p ro a c h e s
c o n c e rn e d
w it h
b io d iv e r s it y ,
e c o lo g ic a l
fu n c tio n in g a n d r e s ilie n c e , a n d c a rry in g c a p a c it y in a g e n e r a l e c o lo g ic a l
s e n s e w ill c o n t in u e t o h a v e a n im p o r t a n t in f lu e n c e o n s u s t a in a b le d e v e l­
o p m e n t th in k in g . O v e r a ll,
iic h a p p r o a c h e s a re c o n c e r n e d w ith a s s e s s in g
h u m a n k in d 's im p a c t o n e c o lo g ic a l s y s te m s . T o t h e e x t e n t t h a t e c o n o m ic
a n a ly s is
of
s u s t a in a b le
d e v e lo p m e n t
is
a ls o
c o n c e rn e d
w it h
such
im p n c ls , t h e n i l is im p o r t a n t th a t e c o n o it iis is a rc a w a r e o f th e c o n t r ib u ­
tio n
of
e c o lo g ic a l
a p p io a c h e s
lo
s u s t a in a b ilit y .
Som e
of
th e s e
a p p r o a c h e s m a y a ls o h e lp in re s o lv in g t h e is s u e , d is c u s s e d in C h a p t e r 2,
Table 5.5 S iin ila rid e s between intensive M onocultures a n d Stressed Ecosystems
High dependence on extra energy
Short residence tim e of energy
Increase in exported or unused primary production
Increase in nutrient turnover
Increase in nutrient loss '
Decrease in resource-use efficiency
Increase in growth-species
Increase in parasitism, diseases and other negative interactions
Increase in horizontal one-w ay transport
Decrease in vertical cycling
Few, simple, rapid, open (leaky) cycles
Shortening of food-chains
Network w ith low average m utual (nformation
Simple structures w ith few hierarchical levels
Low complexity, low diversity, low system efficiency
Throughput-based systems due to reduced internal cycling
Source- OiOum. 1 9 8 5 ; Folke and Kautsky, 199 2
~
~ ~ ~
of w hether som e form s of natural capital are essen tial to overall e c o sy s­
tem functioning and thus human liveliJioods and well-being. O thers may
form the b a sis for new e co lo g ical e c o n o m ic a p p ro a c h e s to co m p le x
en viro nm ental p ro b lem s, su ch as a ssessin g the w elfare im p licatio n s o f
b iod iversity lo ss, w hich may require the com b in ed an a lysis of eco n o m ­
ics, ecology and other discip lin es. We happen to disagree with this latter
view, but th is is an im p o rtan t issu e w hich we return to in C h ap to r 10.
IN SEARCH OF
INDICATORS
OF SUSTAINABLE
DEVELOPMENT
E d i!€ d b y
O nno Kuik and Harinen Verbruggen
Insiiiiite fo r EnvirotimeiUal Studies
fr e e Uiiiversily Amsterdam
Amsterdam, The Netherlands
K LU W E R
A C A D E M I C P U B L lS H lilC y
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No part of the material protected by this copyright notice may be reproduced or
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Printed in tlic Ncllicrlinids
Indicators o f sustainable development: an overview
lla m ien Verbruggen and Onno Kuik
"Is tJiis c o u n try 's or tlial re g io n ’s econom ic perfonnance m ore sustainable in 1991
than it w as in 19817". Finding m easuring rods to answ er questions like tliis one, was.
according to O psclioor and R eijnders (Cliapier 2), tlie loosely form ulated objective o f
the w orkshops tliat w ere organized in the fall of 1989 and early 1990 by the Institute
fo r lijivironm enlal Studies of tlic Free U niversity of A m sterdam at the request of the
N ellierlands’ N ational Institute o f I’ublic JlcallJi and Ertvironm ental fVolectioii (RIVM).
Tlie p ap ers p resented at these w orkshops, which w ere attended by botli scientists and
policy-m akers, fonn tJie core o f this publication. In tliis introductory chapter we try
to pul Uic different conlriliiilions into ;>ci.sj)ccljve and hJglili^ht som e of Ihe topics that
w ere discussed al the w orkshops.
T h e w orksliops w ere organized bccdiiso. although 'su.slniiinble dcvelopm eiil ’ is
becom ing a key concept and even a goal in D utch and international environm ental
policy, tliere are no m easuring rods o r yaixlsticks to m easure practical policy iniliativcs
against tliis goal, UiiJess tliere is som e clear m easure or at least .som e.indicator of
sustainable developm ent, llie crfcciivciie.ss of cnvironm cnlal or otlier policy towards
this goal can not be assessed. A s ten Ui ink (C hapter 7) jx>ints out, it is not so much
that environm ental inform ation, on which a policy of sustainable developm ent must
be based, is m issing; it is the fragm cniaty, often qualitative and very detailed nature
o f tire inform alion that ham pers its direct usefulness in policy m aking. What we need
is adequate infonnalion tliat is tailored lo quantitative eiivironinental objectives.
"A dequate" m eans infonnation;
- w hich gives a clear indication wlictlier objectives will be met,
- o n tlie system as a whole,
- of a quantitative character,
- understandable for non-sciculisls.
- containing parum olers wliich can l>e used for longer tim e periotls.
Tlie search for indicators of sustainable developm ent m eans the search for policy
relevant and colierent environm ental inronnation w hich adlieres to these criteria. But
w hat exactly are indicniors? In incasuieincnt theory Uic tcnn indicator is usetl for
tlie em pirical specification of concejits ilini cannot be (fully) ojxirationalized on the
basis o f generally accepted rules (Vo.s r / al, 1985). Tlieir prim ary function lies in
detnand for concise infom iation. M ore specificaily. indicators may be used for two
iiitertw uied purposes (ibid.);
1. plannm g: problem identification, allocation of socio-econom ic resources and
policy assessm ent; and
2. com m unication: notification (wanting), inubilization and legitim ation of jxxlicy
m easures.
T liere are otJier w ays to bruig tlie tlireots lo susiainable develojnncnt to the attention
o f econom ic planners, 'flic best way would be to rcacli a full integration of economic
and natural resource accounts. However, tin's is not readily achievable, due to lack of
data and as yet unsolved m elliodological problem s. Given tJiis state of affairs, it is
preferable to m onitor sustainable developm eni with a set of "quick and dirly"
indicators. A s w e have seen above, indicators are a com proinise betw een scientific
accuracy and the dem and fo r information.
H ave die w orkshops been successful? Yes, inasmncli as tliey contributed lo the mutual
understanding of policy-m akers and scientists of eacii o d ier's needs and possibilities
regarding sustainability indicators. Jm ponaiil quc.siions regarding the type, dim ensions,
scope and construction of indicators w ere raised and discussed. The quality of the
individual paf^ers and the urgency of the subject led to the decision to present iJie
results o f tlic w orkshops lo :in inicninlioniil :iii(.licncc. 'Ilic w orkshops wore not
successful inasm uch as we did not find the m easuring rod to answ er die sustain ability
question; but tJiis could hardly be expected at this stage where there is not even
co nsensus on die exact operational m eaning o f the concept of sustainable developm ent.
T his d oes not rnean, how ever, that w e think diat indicator developm ent should w ait
uniiT the last questions about this concept liavc been answered: w e see indicator
d evelopm ent and die operationalization o f sustainable devciopinent as a two-way,
cross-fertilizing activity.
W hat should be m easured by indicators of sustainable developm ent? To answ er the
question w hether tlie developm eni of a region or a nation is suslainabie o r not, we
m ust first decide which developm ents are iniporUint for tlie sustainability issue. As
O pschoor and Reijnders (C hapter 2) point out, this question has scientific as well as
ethical angles. D o w e ju st look at the sustainability conditions for tlie hum an species,
or do w e include other species as well? A lthough tJiis point was not com pletely
settled, m ost w orkshop participntils agreed llint suslainnbiliiy sliuuld not be defined
from a purely fuiiclioiiali.st or 'n airo w ' ccuiiomic perspective. The ecological
sustainability or viability of econom ic deveIo])iiicnl was stressed. In this interpretalioii,
tlie em phasis is on die preservation of prudently and stringently defined environm ental
capital to be passed on ’intact’ lo future genciaiioiis, as a developm ent potential.
Environm ental capital refers to the quantity and iiualily of the natural resource base
of a region. Indicators o f sustainable developm eni sliould take account of tlie
’integ rity ' of natural elem ents and structures, and of die 'diversity' of species and
system s.
T o b e m o re p recise, a m easure o f su stain a b le d ev clo p n ien t should in clu d e in d icato rs
fo r th e p re ssu re from so c ie ty on llie en v iro n m en t (pollution, reso u rce use), and
in d icaio rs f o r die state o f the environiiicnl (ecological integrity o r bio-diversity). Both
(sets of) in d icato rs sliould confront actual flow s o r stales w ith su stain ab le flow s o r
states. O p sc h o o r and R eijn d ers (C hapter 2) and H ueting and B o sch (C hapter 3) take
th e se su sta in a b le flo w s and sla te s as ex o genous to the. in d ica to r d ev elo p m en t p ro cess;
j su sta in a b le flo w s and stales at so m e point in tim e m ust be d efin ed by sc ien tists o r
b y th e p o lic y p ro cess. 71iis su stain a b le ’ic fc re n c e ' is, o f course, critical to die v alidity
o f th e in d icato rs. O psclio o r and R eijndci's m oke m any v alu ab le su g g estio n s on tliis
su b ject. T lie req u irem en t that diis 're fe re n c e ' sh o u ld be 'l>eyond d o ubt and d is p u te ’
(B raat, C h a p te r 6) se e m s to be aim ed too liigh lo liave m uch p ractical m eaning.
N atio n al In co m e A cco u n ts, fo r instance, have been disjiuled as long as tliey exist;
iievertlieless, they liave serv ed m any p ractical purposes.
B ra a t
(C h a p te r
6)
adv o cates
a so m ew h at
d ifferen t
ajiproach
in
w h ich
actual
d e v e lo p m e n ts in th e m an -c n v iru n in cn t sy.slcin arc m odelled in a dynam ic sim ulation
m odel to g e n e ra te future v alues fo r .selected so cio -eco n o m ic and en v ironm ental
v ariab les. T lie fu tu re p a lle m o f dcvclojim ciit o f diese v ariables can then be assessed
to b e su sta in a b le o r not. Brant ]x>Ints Out that tlicrc is not o n e su stain a b le fu tu re, but
m an y d iffe re n t o n e s w idi d ifferen t levels o f k ey -v ariab lcs (population, incom e,
e n v iro n m e n ta l quality). F rom tlic set o f p o ssib le su stain ab le futures, a set o f
a c c e p tab le su sta in a b le fu tu res m u st be selected. T liis selectio n m u st be le ft lo the
p o litic a l sy stem , 'This is a ch allen g in g jirogram m e, indeed. H o w ev er, g iv en B ra a t's
g e n e ra l re q u ire m e n ts tliat |>ertain to in dicators -tliey m u st be a ttra ctiv e and
re p re se n ta tiv e, h a v e a sc ie n tific basis, and b e q u an tifiab le- it is diis last req u irem en t
(q u an tifiab le) w h ich , at least in die short term , seem s d ifficu lt to m eet.
T h e s a m e ap p lies to an opproncli wliicIi is b ased on N atural R eso u rce A ccounting
(A m tz e n an d G ilb ert, C h ap ter 5). N aturul R esource A cco u n tin g seek s to correct o r
su p p le m e n t tiie sy stem o f n ational (econom ic) accounts w ith in fo rm atio n on the
q u a n tity an d q u a lity of natural rcsourcc.s, on the basis o f the correct view that a
n a tio n ’s w e lfa re is n o t o n ly d e p en d en t ujion tJie q u an tity and q u ality o f tnan-m ode
ca p ita l a n d h u m an re so u rc e s, but also on its slock o f natural resources, A m iz en and
G ilb e rt g iv e .a v e ry read ab le account of (he attem p ts that have been m ade in v ario u s
c o u n trie s (e.g., N orw oy, In d o n esia) lo Integrate natural reso u rces in the p revailing
sy ste m o f n atio n al accounts. Jfo w c v c r .•.(imulaling th eir d iscussion, th e ir conclusion
p o in ts lo llie fa c t tliat it can n o t be exfjcctcd that N atural R eso u rce A ccounting will
in (lie s h o rt term su cceed in fully iiitrg rn tin g the en v iro n m en t into the econom ic
accounts.
Not all is said and done on Uiis particular approach, however. Hueting and Bosch
(Chapter 3) quote an hidonesian minister who, being confronted with tlie theoretical
problems in constructing a money-ineasure for environmental losses, remarked; "If a
eoretically sound indicator is not possible, (Jicri find one that is ratlicr less
teoretically sound." l l i e approach advocated by Iluctiiig and Bosch is, as diey call
. 0 practical solution for a ihcorcltcal dileininn. l l i e tfieorelical dilem m a -the
obJems o f a m onetary valuation of losses o f environm ental functions- is eAplaiiied
J i l l by H ueting and Bosch and by O pschoor (Cliapier 4), but tlieir conclusions differ,
(jschoor rejects tlie m onetary approach and focuses on diniensionless indicators
ractions, percentages). H ueting and Bosch stick to a (somewhat sim plified) m onetary
jproach. T h eir disagreem ent is not so m uch Uieoretical, but has a practical origin.
Iiey tend to disagree o n the expressiveness or attractiveness of Uie different form ats
iiQrietary versus iion-inonctary) for policy-m akers, and especially for econom ic
aiuiers. TTiis is an im portant issue; it w ould take m ore social rescarcli to settle the
icslion w hether and to what extent cconontic jrlainicrs arr: more impressed by
onctary or non-m oiictary infoi inalioti oboiil (he eiivirutiitieiil.
Iiese fundam ental questions and jjossible approaches arc dealt with In die first five
laplers o f tliis Volum e. T he next tlirce chapters are of a m ore practical nature, Jii
liapter 7, ten B rink describes an ecological indicator w hich was developed for, and
actually used by, Dulcli w ater auUiorities, for the purpose of form ulating and
/aluating goals for the biological com ponent of w ater systems. Ten Brink argues that
lis indicator -tlie so-called A M O EBA - could well be used in a w ider ecological
jnlext to provide a useful indiculor for sustainable developm ent. Starting point of the
M O E B A approach is llie fonnulation of a reference situation for a specific
;osystem . Tliis is a situation in w hich Uie system has not at all, or only slightly,
.•en influenced by hum an activities. Tlie assum ption is m ade tliai ilie closer one
>mes to tlie poin t of reference, the larger tlie guatantee for ecological sustainability,
he search for ecological objectives -or sustainable developm ent- can be reduced to
le question: w hat is tlie m axim um acceptable disi.m ce to the point of reference? Tlie
Terence is expressed in num bers, distribution aiul/or liealtli of a num ber o f selected
jecies. A M O E B A depicts reference, objective, and present-day situation in an
tractive graphical form .
I C hapter 8 U do de H aes et al. discuss the |x>ssibllities of quantifying ecological
jje cd v e s -sustainability slandaids- for terrestrial ecosystems, Tlie situation for
rrestrial ecosystem s is m ore com plicated tlioii iliat for aquatic ecosystem s because
>r m an-m ade ecosystem s, e.g., agricuituraJ land, (lie ’reference’ cannot be found in
iidisturbed nature. A n environm ental qualily target must be constructed. O f course,
lis larget h as to relate to tlie present or potential functions o f the area considered.
'n the iiighest level, a distinction is m ade between cultural and natural areas. Further
istinctions are m ade on liie basis of a liierarcliic classification of ecosystem s. Targets
lust be form ulated for 26 ecodisirict types in tlie Netherlands. Targets must relate to
liysical, chem ical and biotic variables. These variables must have relevance for
appeal lo tlie general public and/or ixjlicy-meikers. Udo de H aes e t al. present a
p rictical exam ple of Uieir apjiroach for a lowland peal area.
In die final chapler, dc lio e r et al. discuss die developm ent of an integrated
enviioMineiital index, com bining air jxilluiioti, noise, odour and risk o f calam ities, for
use in land-use zoning. 'J lie problem s that were faced Li developing tliis index may
provide lessons for die developnieiil of sustainability indicators. Firstly, de Boer et
al. have com bined em jiirical data and value judgm ents in die construction o f their
index. In die preceding chapters of dii.'; V olum e it w as m ade clear that Uiis
com bination is basic to die dcvc/opm cul o f sustainability indicators. Secondly, die
chapter show s how die developm ent of an index (or indicator) is shaped by die
particu lar (policy) context fo r w hich it is intended. Tlie audiors distiiiguisii between
tw o m ediods for developing die index: a scientific m cdiod, based on heailh effects
and a jw licy-oriented nicdiod, based on target values of quality standards. Tlie
d ifference in approacJi resem bles die diffcjcnce in approacJi of Braat versus O pschoor
and Rcijnders. It is, dicrcfore, interesting lo see how dc I3oer et al. evaluate both
approaches. Firstly, tlicy conclude that ii would be prem ature to choose a inetliod
w idiout additional research. Secondly, they jxiint to the fact Hint, nllliougli preferred
from a scientific point of view , die scicniific approach can easily becom e deceptive
because of ail kin d s of (necessary) sinijdifications. From a policy-oriented point o f
view, an index based on target levels of legal standards w ould be preferable. The
audiors doubt, how ever, w hedier such an index would give a m eaningful representa­
tion of the com bined influences on die i|uality o f living conditions. O f course, these
conclusions can be easily transferred to die area o f sustainability indicators. It seem s
that w e have lo keep navigating bclwccn Scylla and Cliaryhdis: on Ihe one hand
indicators w hich are conceptually sound, but which can be deceptive because of the
sim p lifications that are forced by our lim ited know ledge of m nn-envlronm enl inter­
actions; o n the oth er hand indicators lliat are m ore or less, in H u eting's words,
practical solutions lo theoretical dileiniiias.
N onedieless, all participants to the w orkshops agreed that the developm ent of
indicators fo r sustainability should be vigorously pursued, preferably along tlie
follow ing lines:
1. h id icato r dcvclcjnncnl needs to Ito a muIlidjscipJinary effort, Jnlcgralion of
contributions from natural and social sciences on diis subject is essential.
2. It w ould be ideal to integrate natural resources into national econom ic
accounts. M onetary valuation of natural resources is desirable, in the first
instance to try to internalize natural resource use in econom ic decisions.. It
seem s, how ever, that this ideal cannot com prehensibly be achieved in the
foreseeable future,
.
3. A com plete sel of Satellite A ccounts of natural resources in p liy sio l
dim ensions w ould also be very desirable. AJtJiough effoits will and should
continue to develop tJicse accounts, il is unlikely that dicse efforts will show
results in tlie near future eitlier.
4. In the short term , therefore, (physical) indicators seem die m ost promising
option, bidicotor devefojaneiit and tlie developm ent of naluraJ resource accounts
(in m onetary and/or physical tenns) m ust not be viewed as contradictory, but
sliould be seen as cros.s-fertilizing activities.
5. Indicators stiould include botli causes and effects of enviroiiinentai degradation
and resource depletion. These indicators could also be used in econom icecological m odelling exercises. Tlie workshop participants w elcom ed
the
conceptual fram ew ork
provided by O psclioor and Reijnders (Cliapter 2).
Several partial approaches, fo r instance die A M O EBA ajjproach, may well be
integrated into tiiis approach.
W e w ould like to conclude Uiis introductory CJtapicr by recalJing die old trutJi which
says tliat scientific progress is for only 1% brouglit about by genius, and for 99% by
sw eat and hard labour. W e ho(ie tliat dioro is som e genius hidden in the following
pages; but w e are certain iJiat it will lake much sw eat and hard labour to arrive at
a se t o f indicators which will m ore or less m eet the objectives sketched above.
Finally, w e w ould like to lliank Mrs Dila Sm il for the hard labour and genius that
w ent into die careful w ordprocessing dial mode du's pubticalioii possible.
References
V os, J.B ., J.F . Feeiistra, J. de Boer, L.C, Draat, J. van Baaleii (1985).
tlie State o f the EnviroiinieiU. R-85/1, bisiitule for Etivirumiicmal Studies, Free
U niversity, A m sterdam .
T o w a r d s su sta in a b le d ev elo p m en t indicators
Halts Opschoor and Lucas Reynders
1.
Iiilro d u c tio n
l l i e econom y and tlic natural cnviroiinicnt interact, l l i e condition o f one is of
im portance to tlie oilier. O n the one liaiul. econom ic activity is based on the continued
availability of sufficient m aterial and energy resources and an environm ent Uiat is
sufficiently clean and attractive. Iii.sofiir os tlie econom y is based on renew able
resources, the jirojicr functioning of nniiirnl processes and system s m ay becom e an
essential precondition for society’s ccinlinuily. On the other hand, by discharging
pollution and by oilier features associatcti wiili hum an activities, society is interfering
witli Uiese environm ental processes and .systems. In this pniier a first attem pt is made
to arrive at a system of indicators of the condition of tlie environm ent in lerm s of its
capacity to sustain econom ic aciiviiy. Sustainability indicators reflect the
reproducibility of the way a given society utilizes its environm ent. H ence, they differ
from classical environm ental indicators: lliey d o not sim ply reflect environm ental
conditions o r the p ressures on the cnviionm ent, but they indicate lo wlial degree
certain pressures or environm ental im pacts the earth can deal w ith in a long-term
perspeclive, witliout being affected in il.s basic structures and processes. W e refer to
lliis cap acity of the ciivironnicnl as ’ecological vtobilily’. In a sense, Uiercfore,
sustainability indicators are norm ative indicators: Uiey relate actual, 'o b jectiv e'
developm ents to a desirable condition o r goal;
L oosely form ulated, tlic objective of tliis exercise is to find m easuring rods that can
assist researchers and policy evalualors in answ ering questions such as; "is t/iis
co u n try ’s o r that re g io n ’s perform ance more sustainable in 1991 than it w as in
19817". H ence w e need to start from sonic presupposilion of what these m easuring
ro d s oug h t to look like (Section 2), and we need to consider the im plications of
applying Uiem to specific countries or regions (tlie im putation problem of Section 3).
W e w ill co m e face to face willi tlie need lo giv e substance to the notion of ecological
viability (Section 4) and how this is to be defined w hen taking into account
possibilities to replace natural assets by m an-m ade ones (Uie substitution problem of
Section 5), Sections 2 ilirough 5 relate societal developm ents and environm ental
change lo various notions o f sustainability. We shall subsequently touch upon tw o
m ore tectm ical issues (die aggregation and uiuicaior construction problem s, Beclion
C) and finally present som e exam ples of ocluni or possible sustainability indicators
(Section 7).
2.
E invironnicnfal In d ic a to rs a n d S u sta in a b ility In d ic a to rs
F or the purposes o f this C hapter environm ental indicators can be defined as quantita­
tive descriptors o f changes in eitJier (antliropogenic) environm ental pressure or in the
state o f the environm ent. Tlie fo n n e r type o f environm ental indicators w ill be referred
to below as 'pressure indicators' and tlie latter as 'environm ental effect indicators'.
E nvironm ental pressure indicators express (changes in) die uinounis/levels
of
em issions, discharges, depositions, ijitervenlions, etc. in a predeterm ined region. The
p ressu res exerted by society on die envirotimciil aic com m only categorized as follows:
a)
pollution, b) overexploitation of resources, and c) landscape and ecojystem (s)
and/or organism s m odification. Pollution entails the introduction into the environm ent
o f substances o r energy residuals diat (may) have a negative impact. Overexploitation
refers lo w ays and levels of 'cro p p in g ' or 'harve.siing' notural resources, so diat their
future supply is at risk. M odification of ecosystem s and landscapes con take Uie fonn
o f changes in physical structures in such a way or at sik Ii levels that die system s'
integrity is in jeo p ard y by, for instance, too large a reduction in size of groundw ater
table ch a n g e s^ Even w ithin sm all countries such as the N etherlands the num ber of
different types o f pressures on the various environm ental com partm ents (air, w ater
soil), resources, landscapes and ecosystem s tends lo becom e very large. (Environmental
pressures can be regarded as structural or incidental shocks that are transform ed and
transported in a variety o f natural processes (biological, chem ical, hydrological,'
atm ospheric) m anifesting tliem selves into changes in conditions in the environm ents
o f various receptors. T hese receptors include hum an beings, populations of plants and
anim als, resources, ecosystem s, landscapes, and artefacts. The relevant environm ental
conditions can be regarded as so m any dim ensions of the concept of 'environm ental
q u ality ’: die potential(s) of the environm ent to satisfy dem ands by llie various
categories of receptors^
E nvironm ental effect indicators express the con.sequences of environm ental quality
ch anges in term s of tlieir effects on certain (predetermined) rcccjiiors, as enum erated
above. F or hum an beings, for instance, effect indicators could include repercussions
o n the pattern of w elfare over tim e, and heallli indicators. For other species one could
m on ito r environm ental effects by looking at qualities and sizes of populations, niche
size o r biotopes. At die ecosystem s' level, effect indicators could include integrity,
biological diversity and buffering capacities.
(jV lien attem pting to develop suslainabiliiy indicators, one lias to m ake clioices os to
the relev an t types o f environm ental change.) W e opt for a broad approach, w hereby
a w ide ran g e of receptors as listed above is laken as die starting poinjp Tltis im plies
an elaboration o f tlic notion of sustainability beyond tliat o f purely nntfiropocentric
'functionality* or utility (see Section 4). If, furtlierm ore, one w ishes to develop a
m anageable set o f indicators in ten n s o f llicir num bers, one has to address the issue
o f how to aggregate, o r select from, the large num ber of actual environm ental
(pressure o r effect) changes (see Section 6).(Starting from our initial sum m ing up o f
types o f environm ental pressure, we suggest tliat there are at least three areas for
w hich sustainability indicators arc required: (i) pollution, (it) resources, (iii) biological
diversity^
'
As w as noticed in Section l.^ u s ta in a b ility indicators are not sim ple 'stale indicators’
but rath er indicators o f states vis-d-vis som e reference situation; the latter could either
be som e past environm ental slate', or a future one tliat is regarded as m ore desirable
tlian die p resen t^ S ustainability indicators are dius m ore liian m ere state descriptors;
they are norm ative m easures of tlie ’distancc(s)’ between current slates and the
reference situation. W e are not m erely interested in die am ounts o f acid produced over
a certain area o r deposited in som e region, but we wisJi lo relate sucli uidicators to,
e.g., policy-detenniiied em ission m axim a or critical loads. Tliese reference conditions
operate as 'P lim s o ll-lin e s ''(d ie m etaphur is H erbert D a ly ’s) and the sustainability
indicators m easure die distance between the actual w ater level and die Plim soll-line.
As sucli, iiifom iation on diese distances m ay help in answ ering questions such as: is
tliere scope for furtlicr econom ic dcvclo|>nient in a region? w hat is die urgency of
taking pressure alleviating m easures? is society m oving tow ards an unsustainable
pattern of econom ic activity? It goes without saying that there will be no single
Plim soll-line in diis case: it will be a sel o f slandards and coiulUtons, and
unfortunately these various elem ents may in fact be iiUerrelaled, iJius providing
analysts wiUi a radier diffuse description of the reference situation. One way of
visualizing this m uitidim eiisioiialily is by using die ’A M O E B A ’ m odel (Chapter 7, this
V olum e), w liere a c irc le ’s circum ference depicts die reference situation and each
radius is a dim ension o f sustainability; actual situations are points on these rays that
w ill norm ally not lie on die circum ference.
3.
E iiv iro rim c iit a n d eco n o m y a.s o|icii .systems
An eco n o m y m ay be defined os a set of productive and consum ptive activities (and
die actors involved tlierein) w idiin certain territorial boundaries, but the environineatal
■'
n o tio n o f
A g o a d t x a i n p i r o f itid ic a ia r s u s in g a p a s ! s in ia tio n as a r e fe r e n c e p o i n t is p r o v id e d b y te n B r in k in h is
fC fia p ttr 7, tfils V o Iu m tK
10
pressure and hence the question of an econom y’s sustainability draws attention to
environmentaJ changes beyond tliese boundaries.
Environments are open systems linked by various processes of transportation,
migration, etcetera. Tlie environnienlal impacts of economic activities may tlius be
transferred tlirough environmental processes from one place to anollier, even beyond
national boundaries. Acid deposition in Sweden os a consequence of combustion in
die UK is one example; a liigher incidence of flooding in Bangla Desh doc lo
deforestation on the Himalayan slopes is anoUier. Effects such as holes in the ozone
layer and die greenhouse effect are examples on a global scale of the often long
padis of pollulanls Uirougli space, and die distances between sources and points where
effects manifest themselves. Harvesting activities by one economy on a shared
resource will affect the quality of the resource for all that use it. 'Ihis phenomenon
of spadal interdependency has several conse<]uences. Firsdy, as tlie environmental
consequences of an activity may extend to other countries, die full sustainability
impact of diat activity involves adding die environmental impacts in all affected
countries. Secondly, as a country's cnviroiiineiiliil quality may be burdened by influxes
of pollution from abroad, tliere may be a divergence between on econom y’s direct
burden on the environment on die one hand, and the change in its own environmental
capital on die otlier.
Disregarding recharge and regeneration, couniiy A 's environmental capital E(A) is
decreased by: (i) die influx M(B) of degradation from otlier countries B, and (ii) A ’s
own domestic environmental pressure P(A). A ’s total Environmental Pressure EP(A)
(i.e. the total of all environnicntai impacts of all relevant economic activities) equals
P(A) plus X(A), which represents oil of A ’s impacts elsewhere. These variables are
related as follows;
dE(A) = P(A) +M(B) = EP(A) - X(A) + M(B)
"riiis leads to a first moment
environm ental capital E (i.e.
quality, within tlic territory),
exercises leadiiig to diffeieiu
one, or monitoring bolll. Wc
(1)
of clioicc. Monitoring the development of an ccoiioiny's
the total of all resource stocks, including environmental
and inoiiiluriiig die development of a country's EP, ore
outcomes. One lias to choose between monitoring either
opt for the latter: tnoniloring boili.
Furthermore, econom ies ore iionnally open .systems widi levels of production and
consum ption linked by intcniolional trade flows. In such cases, a port of llie
environmental burden of a certain product or a certain activity in country A may
occur in country B. An example is llte defoic.st.itioii and soil exliaustion in niailaiid,
associated with die cultivation of die cassava which, in ihc fonn of tapioca, is
exported as pig feed to Dutcli intensive pig farmers (van Amslel ef a/. 1986).
Similarly, by exporting certain products, couiiiiy A may itself face only part of the
I I
environm ental problem s associated wiih iliat product, nam ely the production related
ones: it will not suffer tlic use related ones in ilic couiUiy of destination, C (Veime
e t al. 1989). A n exam ple is provided Uy drins o r other pesticides tlint used to be
produced in E urope {with jKjllulion coiv:;< <|ucnccs tticre) hut w ere m ainly used in lliird
world countries (w ith ecosystem s dam age and v/aslc related problem s in die
consum ing part of Uie world).
T liis raises tw o further questions: (I) .should these eiivirontucntal consequences of
forw ardly o r backw anJly linked foreign activities be aggicgated to obtain a m easure
o f overall environm ental pressure; atid (2) if so, in country B or C w here tliey occur,
o r in country A w here Uie activity is located Uiat ultim ately gave rise to tlicse effects?
T h e first question arises when one coii.'iiders the environm ental im pacts of a certain
activity to be the total o f tlie im pact uf that activity itself arid tlie im pacts of alt
backw ardly and/or forw ardly linked activities. In terms o f a co untry’s sustainability
Uiis is no problem if all activities lake place witliin llie boundaries of tJiat country,
but tills m ay not be the case. For reasons of putting resixinsibility for environm ental
degradation w liere it intuitively belongs, one m ay in certain cases wish to add the
im pacts in countries B and/or C lo llio.se of A. Tliis m ight be the case w here one
- “^untry deliberately uses the environnicuis o f other countries as additional resources
to its ow n, w ithout Uie oUier country being in a position to dissociate from such
trade relationships (O pschoor 1989b). Exam ples o f such asym m etric relationships can
be found in S outh to Nortlt trade in prim ary products. H ow ever, fo r practical reasons
it appears b etter lo abstain from attem pting lo allocate tlie cum ulative environm ental
pressure (cum ulated, Uiat is, over the var ious stages in the product life cycle) to one
single country w here one specific stage occurs. V arious attem pts at em pirically doing
so (either b y applying input-output techniques -even in single-country situations- or
sim ply statistically analyzing trade flow.s in terms of countries of origm and llie likely
environm ental consequences of Uic production stage in those countries) have rem ained
relatively unsuccessful (Jam es, Jansen and O pschoor 1978; V os 1982, Vcnne ct al.
1989). Ignoring th e environm ental consequences in country B im plied in its exports
’o^A o f interm ediate o r final products m ight result in too favourable an assessm ent
of"the environm ental pressure related to A ’s econom ic process, but on tire oilier hand,
th ese consequences are Uie result of econom ic activities in B and w ill tlierefore show
up in that co u n try ’s environm ental accotmi. And if reasonably sym m etric relotionsliips
in term s of m arket p ow er prevail, tlicn ilic country suffering Uie environm ental costs
o f a trade link m ay be assum ed to have w ilfully accepted it, as a price to be paid for
th e overall g ain Uirough trade.
Based on practical considerations it is iccoim nendcd to incorporate international trade
related transboundary redistributions of accum ulated environm ental pressure only if
sufficient em pirical data is available to incoqw rale Uiese interrelationships.
1 2
4.
Eiiviroiiiiiciilnl Viability
T lie requirem ent o f environm eiiial viability is an am bivalent one in at least two
respects; a) one m oy give it substance from an anthropocenlric or an ecoceiitric poin*
o f departure; and b) one m ay regard it either in a static or in a dynam ic co n tex t
T o begin witli tlie first am bivalence: recently a [ilca was m ade for ensuring 'sus/ai/t­
a b le d ev elo p m en t’ (W CED 1987) defined as: a pattern of developm ent that m eets the
n eed s o f die present gcncralioii without jeopardi/.iiig tlie obility of future generations
to m eet Uieir ow n needs. 'nii.s definition is clfarly anllirojxiceiitric. T he notion of
sustain ab le developm ent, liow evcr, is again not unam biguous (cf. O pschoor 1987 and
1989a). One can stress several aspects, notably tlie socioeconom ic one and llic
environm ental one. Given a sufficiently long tmie horizon and certainty about ail
relevant interactions betw een the econom y and ibo ecology, the two w ould coincide;
but fo r all practical purposes, llie two em phases reflect differeni policies. As time
h orizons becom e sliorter and as one is prepared to take more risks as to tlj(
environm ental repercussions (or their reversibility) o f current activities, the two
interpretations m ay diverge:
(i) In "sustained econom ic growth" llie cm pliasis is on econom ic grow th witliiii
som e (often rallier relaxed and im prudeiilly defined) side conditions related 'to"
environm ental quality and resource utilization. Put in fonnal term s this inlerprelatioii
im plies: positive grow th rates of consum ption jk’j capita, eittier for all future periods
('stro n g S D ', Pearce ct al. 1988) or such tliat tlie net present value exceeds zero
( ’w eak S D ’, ibid.);
,
(ii) A Jtenialively, tJie "enviionm eiilal suslainabiTity'' or "viability" of development
could be stressed. In tliis intcr|jretation, ttie em phasis is on the preservation of
pru d en tly and m ore stringently defined environm ental capital (natural resource base
plus environm ental qualily) to be passed on 'in ta c t' to future generations, as i
developm ent jxjlential.
H ere, the latter interpretation is followed (and expanded below). 'Tliis im plies Ihe
continued presence o f heaJUiy and productive resource regeneration system s jMd
adequate inputs (qualitatively and quanlitatively) to allow tliese system s to function
from at least an nntlu-opocenlric perspective. In order to render the notion of
sustainability m ote ojierational, one has to be explicit about the exact nature of
environm ental quality, E for short. E can be regarded as a set of individual resource
stocks and environm ental qualily levels, and we can say tliat ’sustainability' means
that tlie lim e derivative of eacli elem ent of the vector E must bo positive or zero.
AJlem ativeJy, w e can seek som e sort o f aggregnie A (or vector R wiiJi few er elemeiiu
tJian E) in physical te n n s (e.g., nggrogaliiig encigy resources by expressing Uieni in
o il equivalents o r Joules) and require that dA/dt (or dR/dt) be positive o r zero.
13
F ro m tlie p o in t o f v iew d e v elo p e d so far, co n strain ts on en v iro n m en tal expJoitalion
c a n o n ly b e re le v a n t if Uiey fo llo w from a logic based on an in te rte m p o rally extended
so c ie ta l se lf-in te re st. H ow ever, sustain ab ility con strain ts m ay a lso resu lt from o th e r
p e rsp e c tiv e s. F o r in stan ce, etliical view s m ay lead to rcstriclio n s on en v iro n m en tal
e x p lo ita tio n based on die 'rig iits' to c.xisicnce and dev elo p m en t o f n o n liu m an sp ecies
and naturaJ sy stem s. T liese rights w ould Uien in fact cu rb h u m an u se rigiits.
E ffe c tiv e ly tliis m ig h t im p ly p lacin g n vaiue o n the ’in te g rity ’ o f natural e lem e n ts and
s tru c tu re s, and o n th e 'd iv e rs ity ’ in tc n n s o f species and sy stem s (so-called ’biological
d iv e rs ity ’). In te g rity o r d iv e rsity can to so m e deg ree be reg ard ed as fun ctio n al from
an e c o n o m ic , antliro ix x ien tric p cisjx icliv e (e.g., tJie p o te n tia l d irec t ec o n o m ic v alu e o f
sp e c ie s th e q u a litie s o f w lu ch have not y e t been in v estigated o r d isco v ered , fo r e.g.,
n u tritio n a l o r m e d ic in a l p urposes). S eco n d ly , div ersity an d integ rity can to a large
e x te n t be re g a rd e d as a p re c o n d itio n fui' sustainability, a.s lias been arg u ed above. B ut
Uiese tw o fu n c tio n a list lines o f argum eni m ight n o t be su fficien t to p ro tect all p o ssible
s p e c ie s an d e c o sy ste m s. F o r ex am p le, it could welt be argued Uiat the su stain ab ility
o f tile b io sp h e re (or, fo r that m atter, o f C liina) w ould not be at sla k e if the P anda
b e a r w ere lo b e c o m e extinct. A case could be m ade (on n o n e co n o m ic grounds) (iiat
in te g rity and d iv e rsity are o f a sig nificance beyond tlic d o m ain o f a fu n ctio n alist
ap p ro ach ; a s n o ted e arlier, w e accejil that case. That m eans tliat w e p re fe r to define
’su s ta in a b ility ’ b ro ad ly , i.e. from o jxisition w ith due regard fo r the 'iiiie re sls' o f o ther
sp e c ie s. T liis g iv e s ad d itio n al support for o n e proposal m ad e earlier, n am e ly tliat a set
o f in d ic a to rs fo r (o r ’re fle c to rs ' of) en v iro n m en tal quality cliangc ouglit to in c lu d e o n e
o r m o re in d ic a to rs fo r b io lo g ical d iv e rsity o r ecosystem in teg rity , related to som e
re fe re n c e situ atio n .
T h e s e c o n d p o in t to d eal wtUi is itie c h o ice betw oen a static an d a dyTiamic
in iw p rrtJ tio n . espcxually wJien am .'im xini: ro estab/L'A o f e ra d o n a / de/T m dons o f
tfio to g tc ^
F ro tn a g e o tc^rcu i a n d e>xj/utioriary p o in t or view , o n e ca n n o t
re a lly d e fe n d talring an_)- p a s t siru a u a n as a re fe re n ce po in L R ather, o n e co td d LfunJe
in te rm s o f a ste a d y sta te fo r re so u rce sto c k s o r reso u rce sto ck p o te n b a ls, and fo r
n a tu ra l c y c le s an d eco lo g ical ('life suji|>ort'> processes, jiroviding an ev e r preserved
b ase lin e situ a tio n fro m w hicli ev o lu tio n n ry developm ent c an tak e place. T h ere still
are c h o ic e s to be m ad e tlien, esjjcciaily as to die c h o ice -sp ecific sp ec ies and sy stem s
fo r w liich c o n d itio n s are to b e en sured. Based o n n o tions o f p ru d en c e (or jirecauiion)
tliere is, m o reo v er, a cose fo r defining referen ce conditions safely beyond the m inttna
as d e fin e d b y tJie c iu rc n l sta le o f know ledge. A further jioiiil to d e cid e relates to
sp atial d istrib u tio n . S jiecies an d e co sy stem s d ev elopm ent d o es not n ec essarily h a v e to
be g u a ra n te e d at ev ery p o in t in sp a c e w h ere tticy hnpjwn to be p re sen t today. L o cal
ex tin c tio n
is n o t n e c e ssa rily in com pniible w itli sustain ab ility
(broadly defined).
N aU onal o r re g io n a l au tlio rities w ill hove to d efine to w hat d e g ree it is d esira b le to
m ain ta in c u rre n t le v e ls o f b io lo g ical d iversity. In tlie D utch situ atio n , fo r example, we
w o u ld arg u e tliat o fu rth e r red u ctio n of eco lo g ical integrity is un accep tab le, and hen ce.
14
that a ,b a s e line o f environm ental/ecological conditions is established such Uiat this
in tegrity is safely ensured.
5.
S u h s d lu liu n
In a functionalist perspective it is conceivable tiiat one natural resource replaces the
o th er (e.g., sugar cane as a substitute for fossil energy). W hen resources can tlius be
replaced, tlie unsuslained use of a particular resource may not pose a problem in
term s o f econom ic survival o f the activities using tliat resource. Substitution
possibilities m ay also exist between natural resources and nonnaiural ones, such as
produced capital, know ledge and know-how. IJence, teclinological developm ent or
iiuiovalion m ay lead to an expanded range of options for substitution of one resource
for onollicr, and hence m ay ease the problcinntie nature of the sustainability issue.
T his fact im plies Uiat it m ay in actual practice prove com plex to give concrete
substance lo tJie notion o f 'su stainability'. It may be m ore advantageous lo soil and
bum up a given fossil energy resource, and invest the revenues in tlie developm ent
o f alternative natural resources or even of artificial ones, than to preserve the fossil
resource.
'
E conom ists, in substantiating the notion of sustainability, often feel inclined to
transform all natural resource into one aggregate econom ic value V (expressed in
m onetary term s) by using existing o r calculated icsource prices. 'I'liis entails tlie ideas
^ (i) Uiat correct values for each resource exist o r can be detenuiiicd. and (ii) that
depletion plays n o ro le o r can be neutralized by substitution of one natural resource
for another. T liis w ould then lead to the condition for sustainable developm ent that
dV /dl>0. S o m e econom ists (e.g., Solow 1986) have gone to tile extrem e o f requiring
n o m ore than the nonnegativity of som e value aggregate o f a ll fo n n s of capital,
natural o r m an-m ade. This w ould im ply (he jiossibillty of substitution, w ithout
constraints, o f produced capital o r even know ledge for natural assets. Tliis m ay be
considered tlie eco n o m ist's equivalent of a perjxUuum m obile. Pearce et a i m odify
th e latter approach: they add a set o f (physical) constraints on Uie use over tim e o f
certain essential stocks E R (Uiese constraints may im ply a 'critical m inim um stock'
approach). A t first sight, Utis is an attractive m odification; how ever, environm ental
considerations m ight in fact turn ER into a .set wiUi a raUier substantial num ber of
elem ents, w hich m akes it less convincing o r effective. M oreover, the set of prices
required to carry out tlie transfonnation into value is notoriously lacking due to
m arket im perfections. In Section 4, w e advocated an approach in wliich the elem ents
of E R w ould be selected from a noneconom ic [lerspective, w hich in m any cases
im plies that reference to m arket prices becom es irrelevant.
S till, an operational definition of sustainability requires an answ er to tw o related
questions: a) o v er wliich span of time do we wish to ensure sustainability, and b)
15
liow does one deal wi(J> proposals dial allow for die subsiiludoii of man-made asaeis
for environmental resources? Tlie Iwo (juestions are related to die extent diat future
research and development may broaden the scope for sucli substitution considerably.
T h e first q uestion m ay be answ ered by die requirem ent Uiat a set of physical stocks
and conditions is handed over dial at least ensures econom ic and evolutionary
developm ent potentials at tlieir current levels. Tliis m eans m aintaining (or enliancing)
die q u ality o f die present environm ental infrastructure and biological diversity, o r (at
least) a steady stale in term s o f all essential environm ental structures and processes.
E xam ples arc; putting no m ore fertilizer on agricultural land dian is taken up by
cro p s and livestock; depositing no nioie acid tlian present ecosystem s can safely
absorb o r buffer; cropping trees at or below m axim um sustainable yield.
T h e second question in o u r view leads to an approach o f prudence o r risk aversion
w hen it com es lo assessing the possiliilitics for substitution of one resource for
another and for sc ie n c e ’s and technology's capacities to continuously render new
substitution options. Tliis can be iiicorjxjrated into the I'earce approacJi. Stocks o f
resources will then only include proven slocks, ond only proven new lectinologics
using resources suslniiiahly will be nccoplcd as m odifying die dependency o f natural
resources and hcncc the sustainability situation. For essential renew able resources this
approach entails Uiat: (i) the slock level.s lo be m aintained m ust be higli enough to
safely ensure optim al sustainable offtake, and (ii) iJie quality o f die regenerative
system s instrum ental in regrow ih processc.s be m aintained beyond safe m inim um levels
of environm ental standards.
6.
S electin g a n d U uildiiig In d ic a to rs
Tlie n o tio n o f indicators is an old one. O ECD began w ork on Social Indicators in
1970 (Fox 1987), w hich resulted in a list o f 33 specific indicators grouped under
eig h t headings (OECD 1982). One o f ilic.se is; "Physical Environm ent". Tlic indicators
listed there tliat relate to the natural environm ent are: (i) Exposure to Air Pollutants,
and (ii) E xposure to N oise. It is clear lliat this does not adequately cover the
environm ent-econom y interactions we are concerned witli here. A new set of
Indicators fo r S ustainability needs to be developed. In tlie rem ainder of this Section,
tlie focus will be on indicators m ore diicclJy related to ertvJroiunental quality and
slocks. W e w ill com m ent briefly on tlic follow ing points: (i) the areas for w hich
indicators w ould be needed; (ii) the indicators’ scope, (iii) formal features, and (iv)
the process o f developing indicators.
16
Indicator Areas
Indicators would have to be derived from the specific characteristics of tlie economyenvironment system. Some liave argued in favour of one single overall indicator of
environm ental capital but it is fell tliat at least 3 are needed:
* pollution;
* resources: renewable, nonrenewablc (and scitii-renewable); and
* biological diversity.
We base this on tlie following considerations.
In a functionalist perspective one can distinguish between several types of sources
o f environm ental, services:
(i)
nonrenewable resources such as oil reserves, iron ore deposits; no
substantial natural augmentation or renewal takes place;
(ii)
renew able resources such as forest stands, fish populations, agricullural
crops, where regeneration of die resource is a function of initial stock
levels and die quality of die regenerative systems;
(iii)
semi-renewable resources such as soil fertility, solar influx, ranifall and
groundwater levels: natural processes provide -al a given moment in time
and at a given point in space- n recuncnt but limited -and often uncertainsupply, where diis supply is not a fnnction of initial (stock) levels but
sometimes of other eiivironiiientol factors.
Ideally, sustainability indicators reflect diis variety in circumstances and resource
types. In what follows we develop some resource indicators especially for renewable
and nonrenewable resources.
Tlie absorptive capacities of an ecosystem for jHillution and disturbance fall under
category (iii) of resources, but arc normally analyzed separately from Ute perepective
of environmental pressure and environmental effects. Below, we shall follow this
practice and develop some pollution related sustainability indicators.
A third category o f sustainability indicators we propose to use has no necessary
relationsliJp with economic functions of the environment vis-d-vis society, but has to
do widi the need to monitor ecological integrity or the 'naturalness’ of landscapes and
ecosystem s by reflecting (changes in) biological diversity (i.e. botli species diversity
and ecosystem s diversity), n i e rationale for including this aspect of environr"""'"'
change lias been given in earlier Sections.
IndicaiQiLSgaRs
Tlie literature on indicators of sustainability ha.s produced a wealth of dimensions
tliat would liave lo be incorporated in tliem (e.g., Liverman et al. 1988), including
17
(apart from ’su slain ab ility ’) efficiency and equity. It can
and 'm an ag eab ility ' are iii)|X)Haiit dim ciisions as well. It is
w ork w ill focus on die notions of susttiinability, integrity
indicators w ould be rct|uired w ith a sctqic wide cnougti to
a)
be argued that 'integrity'
suggested here dial future
and m anageability. Tlius,
reflect:
d ie factual developm ents in die use of environnienlal resources; here, one may
be interested in eslablistiing m acro indicators of:
a .l)
the overall environm ental pressure EP, i.e. die environm ental im pacts o f
econom ic
a,2)
activities and cnvironm enlal inaiiagem ent (for instance,
of pollulion, resource inputs, spatial claim s);
die change o f etivironm enlal capital E, o r the 'stale of die environm ent'
(aggregate indicators for slocks o f environm ental
environm eniai qualities, biological diversity),
b)
assets,
am bient
die potentials for m anageinciit tow aids sustainability; diis would, for instance,
req u ire indicators for;
b .l)
current o r anticipated developm ent in science and leclm ology in term s of
enviroruiicntally relevant products, processes, inputs;
b.2)
die developm ent of iiiaiiagciinl tools, sucli os: appropriate inslilutions for
environm ental resource maiiiigcinent, policy instrum ents, budgets, public
support.
In w hat follow s w e shall conccnliote on susiainabiiity and integrity (biological
diversity), and bypass the subject of indicators of m anageability, im portant diough it
is. In o d ie r w ords, a .l and a.2 are elaborated here.
Indicato r Features
In o rder lo facilitate intem ational com parison, indicators w ould have to be fonnated
iden ticad y o r analogously as m uch as jiossible. Itis im perative to stress die need to
severely lim it the num ber o f indicators, if they are to play a part in public decision
m aking,
.
L iverm an et al.
indicators;
- sensitivity
- sensitivity
- sensitivity
- sensitivity
- sensitivity
- predictive
(1988) liave
considered criteria
to change in time
to change across space
lo change over social distribution
to reversibility
to controllability
ability
- integrative ability
diat could be used in selecting
18
- relative ease of data collection
- relative ease of applicaiioit.
It may not be possible to incorporate all tliese criteria adequately, or to do so wliile
at the same lime observing Uie recoinmeiidfiiion tliat only a limited number of
indicators is built.
Indicators: Aepregates or Selections
An important choice regarding formal features of indicators has to do wiUi tlie nature
o l the indicators: are tliey to be UTie aggregates or transformations of underlying,
more specific indicators, or aic Uiey to be selected ('typical' or 'representative' or
'critical') from larger sets? It is felt that the fonner is preferable but not always
feasible, due lo tlie vast aiiioum of infonnaiion necessary lo duly reflect all relevant
environmental processes and due to difficulties in formal aggregation.
Data reduction is a necessary step in indicator development. Sometimes one can
relatively easily aggregate (e.g., when adding energy resources in terms of caloric
value or oil equivalents, or in using acidification properties in combining SOj, NO,
and NHj emissions o r depositions). Where such transformations using physical or
chem ical properties can no longer be made, economic weighing practices may be
considered. Use could be made of market price.s or staled preferences to add otherwise
incomparable phenomena, but we have doubts as to the stability and acceptability of
such procedures (see Chapter 4).
•
Sustainability indicators ideally provide insight into factual developments in tJie
environmetit vw-d-vtr certain lefereiice values reflecting objectives or past values
considered to be more desirable, lliis provides imoUier possibility of aggregating tlie
large num ber of individual indicators; detennining tlie ratio of current environmental
conditions and the corresponding reference values, and using mathematical lecJiniques
to aggregate tliese diinensionlcss figures in some way. Multicriteria analysis might be
of great value here.
Indicator UcvcloiJiiicnt
Tlie development of approjirlale sets of sudi pliysical indicators is a laborious
undertaking and is likely to involve many arbitrary’ decisions (often based on
pragmatic grounds such as data availability) on which variables to select and how
to aggregate tliem (see previous paragraph). Logical steps in a process of deriving
indicators would be;
19
1. identification o f tiie main noiural elem ents of environm ental capital and liieir
interactions; ecosystem s, life sujrport system s, biogcochem ical and hydraulic
cycles, biological diversity, habitats, and the levels o f integrity (com pleteness,
'n atu raln ess') and purity (degree of pollution);
2. identification o f die econoiutcnily relevant features w ithin these elem ents and
their relnlionsliips to s[>ccific t-coiioinic activities (either as inputs into, o r
receptors o f outputs of, these activities);
3. selection o f tJiose elem ents tliat are quantitatively and/or qualitatively at risk,
and a furtJier analysis o f these elctnenls in tem is of; a) tJieir significance in
regenerative and resource supfjoi t system s, and b) substitution options fo r tliese
resources in econom ic activities;
4 . setting of staiidards/targets/critical levels wilh res|xx:t to the elem ents selected
in 3., in relaiJoii lo Llie notions of sustainability and m inim um biological
diversity to be m aintained;
5. construction of indicators reflecting die developm ent o f environm ental capital
from th e elem ents selected in 3.. eidier by building aggregate variables or by
picking specific item s from tJiai set o f elem ents.
In step 5, one could opt for several po.ssibililies:
a) express Uie selected iteins as rates or flows;
b) express tJiem as rates-to-stocks;
c) if step 4 has been completed; express Uiem as rotes-io-goalsor stocks-lo-goals.
Options b) and c) would enable further data reduction by turning the indicators into
dimension less figures. Tlie procedure outlined here would preferably be fed into an
information system linked w ilJi inulticrileria methods, so Uiat aUemative choices in
the various steps and alternative weighi.s could be followed Uuough in terms of Uieir
impact on the indicator values.
7.
E xam ples of S nslniiiabilily IndiLiilvrs
In Uiis part of our pa[>er we would like to present some examples of sustainability
indicators. We w ill resteict ourselves essentially to indicators reflecting pressure on
die environment. Examples of indicators relating to environmental effects w ill be
given in the papers of Udo de Hoes mid ten Drink in this Volume. Our examples
w ill m ainly relate to deviations from a steady state.
However, we w ill also consider Uic case diat an initial state cannot be considered
acceptable in view of suslainability, in w liicli case a steady state continuation of the
uiiUal stale is not sustainable.
2 0
M aintenance of a steady stoic is one of tlie oj irrational definiiions of sustainable
developm ent. A steady slate is n dynamic stale in wliicli changes lend lo cancel each
other out. An example of a steady state is a constant aimospheiic coiicentraliuii of
carbon dioxyde (COjJ. Such o constant concenimlion is the net rcsult of a sizable
em ission and an equally sizable sequestration of COj.
A steady state operationalization of sustainable development is ajjpropriate (I) if die
initial slate is acceptable in view of sustainability; (2) if tliere is no lime lag between
changes in environmental paraiiielers and effects (as occurs in the case of atmospheric
COj); (3) if sustainable development refers to many generations, and, (4) if at the end
of the day tliere is no substitution of physical re.stiurces (like groundwater or ores) by
nonphysical resources (like money or inventions).
M aintenance o f a steady slate in terms of resources, species and pollution would
im ply the following:
- use of (conditionally) renewable resources' should - within a Specified area and
tim e span - not exceed the fonnation o f new slocks. Titus, for instance, yearly
extraction of groundwater should not exceed the yearly addition to groundwater
reserves coining from rain and surface water.
- use of relatively rare iionrenewnble resources, such as fossil carbon or rare
metals, should be close to zero, unless future generations are compensated for
current use by making available for future use an equivalent amount of
renew able resources.
Tlius, for instance, the use of rare metals like lead, indium or copper should be
subject to virtually complete reuse. Dispersive use of lead in petrol would, for
instance, violate this criterion.
A lso, use of fossil carbon would be acceptable, provided tlial, for instance, an
equivalent am ount o f biomass or oUier capturing devices for solar energy are put
aside for use by future generations, and future generations are compensated for sliifts
in exploitation of fossil carbon following from exhaustion of convenJent fossil carbon
sources by tliis generation.
- Significant, tliougli limited, use of relatively abundant nomcnewable resources
such as iron or aluminum meets die slcaily state criterion, provided that there
is com/>cnsation for an increase in cxplotlalion efforts following from
exhaustion of easily accessible and nihiable resources by lliis generation.
- Pollution tliat gives rise to accumulation of pollutants in one or more
environm ental compartments (e.g., atmosphere, sea, soil) in a first
approximation violates a steady state operationalization of sustainability. The
sam e holds for long-lasting pollution (for instance, groundwater pollution,
radioactive pollution around Czemobyl), (he safety of which is not established.
Exposure to man-made mutagens affecting the germ line (involved in
reproduction) should be close lo zero. Violations of tliese first approximations
21
lo a sleody sinie inoy be acccjiijiliio if future geiierniiuns ore fully cotnpeiisaled
for associated iliiinogcs.
A s to natural s[>ccies iti a fiist <ipjiroxiilialioii tlic rale o f exliiiclion o f specie]
sliould not exceed tJie rote of origin. Additional steady slate requirem ents m aj
relate to diversity of ecosystem s, integrity of ecosystem s and ihe conditions
fo r developm ent of ecosystem s.
A steady stale operationalization of sustainability is rather strict, ft is possible to use
Jess stringent criteria for sustainabiJily, for instance, depending on the perceived
absence o f unacceptable harm from pollution or extinction o f species if it rem ains
below specified levels.
T hus, for instance, K rause et al, (1989) have suggested a nonsteady stale criterion
fo r sustainable global w arm ing. W liercas a steady state approach w ould require
constant tem peratures, tlicy projKise an upper level to global w arm ing of 0.1 ”C per
decade and on overall m an-induced equilibrium w arm ing of 2.5°C, because such a
w an n in g w ouid be conijiatible with adaptive possibilities of species and would remain
w itliin past natural fluetualions in llie picsence o f lionio sapiens.
Indicators, fo r conform ity to or devialiun from a steady slate
Indicators for sustainability should first and forem ost indicate w hether o r lo wiiat
ex ten t a criterion for sustainabiJily is met. T he extent to wliich a criterion for
sustainability is m et may, how ever, also show tem poral change, and more specifically
a trend. D eviation from a steady state, for instance, may increase, decrease o r remain
rouglily constant wiUi lime. Sucli a u e n d may also be reflected in an indicator. So.
starting from a steady stale operationalization of sustainnbilily, one m ay define two
indicators. First: a sustainability indicator indicating w hether o r lo what extent the
steady state criterion is m et at a specified point in tim e or over a specified tim e span.
Second: an indicator tJiat reflects Uie temporal trend widi respect to a steady state.
L ater w e w ill intnoduce a tiiird kind of indicator, which is appropriate in situations
in w hich th e initial slate cannot be considered acceptable in view of sustainability.
T his w e w ill call the sanitation indicator.
An in d icato r reflecting confonmiiy to m aintenance of a steady state is defined lo be
positive o r zero when die steady slate criterion is met. A positive value is given
w hen tliere is im piovciiient; for in.sinnce. when use of renew able resources is sm aller
tlian addition to stocks o r wJien pollution levels decrease. An indicator reflecting a
tem poral trend w ith respect to a steady stale is lield to be zero or positive when the
trend leads to confoniiity to a steady .stale either consistently or in due course. An
indicator indicating confonnily to a sleatly stale will be negative w hen the steady stale
criterion is not met; for instance, because pollution levels increase, An indicator
22
reflecting a (ernporal trend will be negative when developments do not lead to
conform ity to a steady state.
Indicators reflecting pressure on die environincut may differ in spatial scope. For
instance, tlie scope m ay be worldwide, continental, national or regional, or refer to
a river basin. Values, including signs, of iiidictitors may be different dependent on
tlieir geographical scope. 'Zlius, for instance, allliough worldwide tliere is a loss of
forests, violating die steady slate cnlerion and thus presumably giving rise to a
negative value for the sustainability tndicnicr involved, particular countries may
expand their forests, and diis may be reflecit^d in positive values for national
sustainability indicators.
Applications of the steady state criterion may give rise to a large variety of
environmental pressure indicators, Here we would like to give some examples of
such indicators, and the signs these may have.
- Tile rate at which natural species die out is currently worldwide roughly 10‘
limes the rote of origin of species (May, 1988). Tlius an indicator reflecting
confoniiity to a steady state developnu-ut should in dus case be strongly
negative. (It would be zero if extinction
rales equalled rates of origin.)
Estimates on die impact of business as usual up to die end of tliis century
suggest that the rate of extinction (as a [xjrcenlage of all remaining spccics)
may remain roughly unchanged or even increase (Myers, 1979; May, 1983),
.
Thus a sustainability iiidicalor reflecting a temporal trend relative to a steady
state development should also be strongly negative.
- The rate of increase in atmospheric concentrations of fully halogenated
chlorofluorocarbons (CFC’s) is estimated to have varied between 4 and 16%
, '
by the end of the 1980s (Prather and Watson, 1990; Reijnders and Kroeze,
' 1990), Because these CFC’s currently cause significant and increasing
deterioration of the ozone layer, on indicator reflecting current confoniiity lo
a steady stale development will be negative. However, a 1990 London
agreement on protection of die ozone layer aims at a ])liase-out of CFC
produclion in induslriolized countries by the year 2000 and in developing
countries by 2010. Allliough actual delciiorotion of the ozone layer is also
depeiidciil on other Jialogcnnlcd conijwuuds, a pliase-out of CFC produclion
m ay contribute to stabilization of damage to die ozone layer and even to a
final recovery of die ozniiesphere, Tlius a .sustainability indicator reflecting the
relevant temporal trend in conformity to a steady state development may be
positive,
- Forested areas in die Netherlands are expanding. Currenlly there is a net
increase in die amount of recoverable wood produced (addition to stock minus
exploitation and die-back), Tlius die indicator reflecting conformity to a steady
stale development may be considered (xi.sitive. Long-temi perspectives for
23
forests in Uie NeUierlantls, how ever, are poor, hicreasing acidification o f soil
tlireatens c')% of current forcsis witli die-back (Nationaal M ilicubeleidsplan,
1989), w hereas a rise in atm osplicric tem perature m ay also negatively affect
D utch forests. U n is the reJevnnl indicator reflecting tlie tem poral trend is
p robably negative.
Use o f fossil carbon iti industrialized countries is far from zero. O f total fossil
carbon used probably less tlian 1-2% is recycled, w hereas die rem ainder is
transform ed into w astes, including pollutants. Tliere is som e com pensation fo r
future generations through the planting of additional forest and the
developm ent o f solar and w ind energy, but overall there is no conform ity to
a stead y state operationalization of sustainability. Thus tlie indicator reflecting
com pliance witli sustainability of fossil carbon use should be negative. For the
n e a r future effo rts have been announced by several countries lo improve
energy efficiency and iiicrca.sc recycling and die use of renew able sources of
energy. Aitliough Uu's w ill not lead to com pliance witli a steady stale use of
carbon in Uie near future, the iiulicalor reflecting the trend in com pliance may
be less negative than the indicator reflecting current confonniiy to a steady
stale developiueiit.
PimcnsiQin and 5i;z.e v f indicntors reflecting confonniiy to a steady slate
If one sticks to an environm ental capital approach lo su.stainability. il will not be
possible lo use die sam e dim ension fur all indicators. U iere is no .sensible physical
transform ation that transform s, for instance, the dim ension species (with whicli a
stead y state o f living nature m ay be partially defined) into dim ensions referring to use
of fossil carbon o r acidification o f soil. H ow ever, Uiere is tlie possibility of using the
sam e dim ension for groups of environm ental variables. F or instance, tlie use of
nonrencw able resources m ay be related to presum able reserves, and may be m easured
witli sim ilar units (for instance, yearly use as a percentage o f presum ed total reserves).
S im ilarly, greenhouse gases (NjO, tropo.spheric ozone, m ethane, carbon dioxyde and
a n u m b er o f halocarbons) m ay be luni|>ed togeUier on die basis o f dieir global
WBnning polenliai (for instance, in W/ni or " Q . Sim ilarly SO ,, N O , and N il, may
be brouglit together on the basis of their acidifying effect on soil and surface water.
T able 1 g ives a m im ber of exam jries of (lo.ssibJe environm ental pressure indicators,
tlieir aggregation levels, dim ensions and .sizes.
Table 1. Dimenaon and size of possible environmental pressure indicators reflecting compliance with a steady state
object
dimension
size
use of renewable lesources
% of total stock added or lost
in a specified time span and area
addition to stock - use - loss
total stock
.#
.
use of nonrenewable
resources
% of presumable reserves lost in
a specified time span and area
.
species
number or percentage of species
lost in a specified time span and area
species originated minus species become extina
in a specified time span and area
(may be divided by total of species)
acidificadon of soil
acid equivalents in a specified time span
and area
neutralization by soil minus acid deposition
in a specified area and time span
minus use .
presumable reserves
«
•
global warming
W/m^ or
added in a specified time span
combined amount of greenhouse gases lost
in sinks minus emission of greenhouse gases
multiplied by global warming potential
depletion ozone layer
ozone depletion (in % or absolute) in a
specified time span
combined amount of ozone layer depleting
substance lost in sinks minus emission of
ozone depleting substances multiplied by
ozone depleting potential
soil pollution amount
quantity of pollutant in a spedded time
span
amount of a pollutant eliminated from soil
plus made inactive minus amount added lo soil
25
In a n u m b er of cases tJie situation (initial state) is such tliat a steady stale w ith
respect to Uiis situation cannot be considered sustainable. Exam ples o f current
situations Uiat are unacceptable from a sustainability point of view are chem ical w aste
dum ps and tJie hole in die ozone layer over die A ntarctic. In such cases an indicator
m ay reflect Uie extent to wluch saniialiun is necessary before tlie situation m ay be
considered sustainable. In die case of soil )X)lluled by chem ical w aste a sanitation
in d icato r m ay reflect Uie am ount of jxillulcd soil w hich is unfit for m ultifunctional
use. Such a soil sanitation indicalor will rem ain negative until a sanitation program m e
generaUng m ultifunctional soil from jiolluted soil is com pleted, increasing the
deviation from a sustainable stale will increase die size o f the sanitation indicator. So,
fo r instance, furUier loss o f ozone from the ozone hole over the A ntarctic will m ake
the relevant sanitation indicator m ore negative.
8.
D iscu ssio n a n d R c c o n iin c n Ja tiu n s
l l i e developm ent over lim e of ‘eiiviroiuiiontal ca p ital’ or even o f 'environm ental
p re ssu re ' is not captured by traditional 'success indicators' such as G D P or National
Incom e. Several proposals have been form ulated to am end dils by correcting G DP,
but this approach Uireatens to be iiicoinjilctc, o r to lack transparency and credibility
(see C hap ter 4, diis V olum e),
■
A n o tio n of 'sustain ab le in co m e’ could be defined and jjerhaps even quantified, only
if so-called 'defen siv e expenditure’, environm ental stock depreciation, and die value
o f rem aining eiivironm etilai degradation could be ossessed. Placing m onetary values
on them m ust be expected lo continue to cause difficulties for the decades to com e;
som e barriers are of an cdiical nature. Given this situation, but also due to a need to
explicitly know the qualily of die environincnt, it is beJicved tliat there w ill alw ays
be a need for indicators expressing the developm ent over tim e o f environm ental
quality in p h y sic a l term s.
Sets o f environm ental indicators should be developed at the level of resources or
activities w itliin a given country. In order lo play a part in 'm erging environm ent and
econom ics in decision m ak in g ’ (WCED 1987) and policy developm ent, the num ber
of indicators proposed m ust be sm all. Tliese indicators w ill have to cover the areas
of: (i) resources (ol all kinds: renew able, nonrenew able, scm i-rencw able ones), (ii)
p o llu tio n , and (iii) Uie biological diversity or iniegrity of ecosystem s.
Indicators are to reflect developm ents vis d-vis net environm ental pressure (EP) and/or
enviroim iental capital (E). Preferably, they are of the types o f rates-to-stocks, or rales(o-goals.
26
n ie scope of these iiidicalors will have to lie broad, ideally includuig observed
sustainability and integrity inipacis, but also the (wlenlials for luanaging economic
behaviour towards these objectives. Tlie pajicr lias not developed tlie notion of
indicators for managing capacities, but focused on the dimensions of sustainability
and integrity.
References
Amsiel, A.R. van et al. (1986). T.aDioca for the Dulcli Livestock Industry. lES Report
R-86/7, Free University Press Amsterdam.
Fox, K.A. (1987), ’Ejivironmental Quality in a New System of Social Accounts".
Archibugi, F, and P. Nijkamp (eds,):. E cotiotiiy and Ecology: Towards Sustainable
UeveJopmenL Dordrecht/London; KJuwer Ac. Publ. 189-203.
James, D.E., H.M.A. Jansen and J.B. Opschoor (1978). Economic Approaches to
Environmental Problems. Amsterdam: Elsevier Scientific Publ,
Krause, E,, W . Bach, J, Koomey (1989). Energy Policy in the Greeniiouse. E r Cerrito.
Liverman, D.M., M .E , Hanson, B J . Brown and R.W. Meredith, Jr. (1988). Global
SustainabiJJfv: toward measurement. Environmental Management Vol. 12, no. 2,
pp. 133-143.
May, R.M. (1988). Science 241: 1441 - 1449.
Myers, N. (1979). Tlie Sinking Ark. Pergamon IVess, Oxford.
Nationaal Milieubeleidsplan (1989). Kiezen of vcrliezen. Staatsuitgeverij, Den Haag.
O ECD (1982). -nie QECD List of Social LiUicfllocs. Paris: OECD.
Opschoor, J.B. (1987), Suslainability and Chniigc (in Dutch: inaugural address).
Anisterdam: Free University Press.
^pJ^^hoor. J.B. (1989a). No D c I u e c After Us: IhccondiliPiis for Sustainable Use of
the_Environment (in Dutch). Kampen: Kok Agora.
Opschoor, J.B. (1989b)"North South Trade, Resource Degradation and Economic
■S e c u n t y " . Bull of Peace Proposals Vol 20 (2); 1 3 5 - 1 4 2 .
Pearce, D.W., E.B. Barbier and A. Markandya (1988). Sustainable Development and
-Cost Benefit Analysis. London:IIEDAJCL.
Prather, M J., R.T. Watson (1990). Nature 344: 729 - 734.
Reijnders, L „ C. Kroeze (1990). pLeventtQii of climate chan^je. Slicliting Natuur en
Milieu.
Solow, R.M. (1986). "On Itie Iniergenerational Allocation of Natural Resources".Scand.
J. E cs. 8 8 (1 )1 4 1 -1 4 9 .
Venne, H.M (ed), E.E.M. Daars, J.F. Feenstra J. et al. (1989). E n v im n m e n l and
Inlemalional Trade. Publicatiereeks Milicubeheer 1989/1. Min. of Eiivir.
Management, Tlie Hague.
Vos, J.B. (1982), "Consumptieve Acliviteiten, Milicuveronlreiniging en Energieverbruik
in Nederland". In: Aikiiig H. et al. (cds) (1982), Mozaick van de
Milieuproblematiek. Amsterdam: Free University Press.
27
W o rld C o m m issio n on E ii"iro n m eiit am i D ev elo p m en t (1987). O u r C pm m Q a F tlto
O x fo rd ; O x fo rd U n iv ersity P ress.
Cleaning-up the Ganges
A Cost-Benefit Analysis of the
Ganga Action Plan
A. Markandya
M.N. Muity '
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5
M easuring N on-user Benefits
from Cleaning-up the Ganges
INTRODUCTION
This chapter evaluates the benefits o f the G A P lo those who do not
norniaJly reside near the river, and who do not use the river
directly. Such benefits are otherwise called non-user benefits or exist­
ence and bequest values as described in Chaplcr 3. There can be
several motives why people who may not be planning to visit the Gan­
ges in their lifetime express satisfaction from the knowledge that the
Ganges is clean.
First, one may feel a general sense of satisfaction from just knowing
that a major river in the country is now cleaner than il was earlier,
whether this stems from ecological considerations or from the point o f
view o f pure scenic beauty. Second, there can be a sense of satisfaction
from knowing that fellow citizens living near the river have a better
quality o f life with a cleaner river. Third, there could be some perceived
benefits from knowing that a river o f major religious significance is
now cleaner. Fin a lly, there is an element o f consideration for future
generations, in that there is a sense o f enhanced well-being from know ­
ing that future generations w ill inherit a cleaner river resource in
the future.
This chapter begins by describing briefly the use o f the benefit es­
timation technique known as the contingent valuation method, which is
now employed w idely to measure environmental benefits, before going
on to detail the specific methodology used in the contingent valuation
survey o f non-user benefiLs from the GAP. The more technical aspects
of the methodology used are presented in Appendix 5.1. Details o f the
calcuiation of the River Water Quality Index used in the estimations are
orovided in Appendix 5.2.
Measuring Non-user Benefits firoin Cleaning-up the Ganges I 85
V A L U A T I O N O F E N V I R O N M E N T A L B E N E F IT S U S IN G
T H E C O N T IN G E N T V A L U A T IO N M E T H O D
Contingent valuation surveys simulate a market for a non-marketed
good providing environmental services, and thus obtain a value for the
good contingent on the hypothetical market described during the survey.
The design o f the questionnaire to elicit individual responses to the
valuation question is thus o f central importance in a contingent valua­
tion survey. N o t only must the information elicited be accurate, but it
must be relevant to the valuation problem at hand. A ll contingent valua­
tion studies yield data and information. However, a poorly designed
study can lead to information that suffers from several biases, including
strategic biases— which mean respondents have tried to conceal their
true preferences (and thus have given dishonest values)— or biases
resulting from the good in question or the hypothetical market being
improperly described to the respondent, There may also be biases
resulting from improper sampling design or execution, and those from
improper aggregation,* Since there is no ‘true’ value o f the good in
question (as determined, for instance, by a market), it is difficult to dis­
tinguish a value presented in a poorly-designed study from that coming
out of a well-designed one, except by examining the details of the
study— including the questionnaire used, the sample covered, and
methods used to aggregate individual responses to represent the popula­
tion sampled.
A contingent valuation survey consists o f several components:
(1) a q uestio n naire, which includes a clear description o f the public
good (or environmental amenity) to be valued, the method o f
eliciting values, and questions on the socio-economic status o f
the respondent;
(2) sam pling
from
the
target
population,
by
suitably-trained
enumerators who interview a sample chosen to be as repre­
sentative o f the population as possible; and
'M itchell and Carson (1989) identify four principal sources o fb ias:
(1)
use o f a scenario that contains strong incentives for respondents to m is­
represent their true W T P amounts; ( 2 ) use o f a scenario that contains strong
incentives for respondents to im properly rciy on elements o f the scenano to help
determine their W T P amounts; (3 ) m isspecificaiion o f the scenario by incorrectly
describing some aspect o f it, or, altem aiivcly, by presenting a correct description
in such a w ay that respondents m ispcrccivc it; and (4 ) improper sampling design
or execution, and im proper benefit aggregation, [p. 235].
See their Table (1 J. I ) on pp. 236-7 for a more complete listing of possible biases
in contingent valuation studies.
86 / Cleaning-up the Ganges
(3)
d a ta analysis, which incJudes deriving average (or household)
willingness-to-pay (W T P ) estimates from the sample inform a­
tion, and then extrapolating household estimates lo the entire
.
population.
Each o f the major components o f a contingent valuation survey are
discussed in greater detail below in the specific context o f the valuation
o f non-user benefits from the Ganga Action Plan.
C O N T I N G E N T V A L U A T I O N O F N O N - U S E R B E N E F IT S
OF TH E G AP
Following an outline o f the procedure followed in conducting the con­
tingent valuation survey o f non-user benefits from Ihe Ganga Action
Plan, detailed description
is presented below.
of the questionnaire and the sample covered
S A L IE N T F E A T U R E S O F T H E C O N T IN G E N T V A L U A T IO N S U R V E Y
Since one o f Ihe aims o f the exercise was to provide an estimate o f the
benefits from the improvement in river water quality from 1985 to
1995, a part o f the benefit estimation had necessarily to be post hoc,
meaning that respondents had lo be asked their willingness-to-pay for
benefits which they had a lre a d y received. This represents a departure
from the conventional contingent valuation practice. This problem was
tackled by asking respondents to simply value the benefits they felt they
would have received from two levels o f water quality (shown in maps),
one as it was in 1985, and the other showing the situation in 1995.
Because the idea o f valuing a river that was ‘half-clean’ or 'threequarters’ clean is conceptually difficult for the respondents, it was
decided first to ask them their willingness-to-pay for best water quality,
which was defined as ‘uniform bathing quality throughout the riv e r’ ,
based on a map showing uniform bathing quality, The idea was to get
the respondents to provide a benchmark estimate for best water quality,
which they could use subsequently to provide values for water quality
as it was in 1995 and in 1985. Maps o f river water quality were drawn
using data from the National Rivers Conservation Directorate (see
Figures 1,2, 1.3, and 1.4), and respondents were asked lo make their
evaluations o f Ihree waler qualily levels using three maps: first for best
quality, then for the 1995 quality, and finally for the 1985 quality. Given
separate values for each scenario, several incrementa! values can be in­
ferred subsequently. For example, subtracting the value given for the
Measuring Non-user Benefits from Cleaning-up the Ganges i 87
19S5 q u ality from that given for the 1995 quality would give the in­
cremental value o f the benefits o f the im provem ent in water quality
from 1985 to 1995, one o f the target questions o f the overall project.
Lastly, the elicitation form at (detailed in Table 5 .1 ) used a variant o f
the open-ended bidding gam e form at, backed by a version o f a ‘P ay­
ment C a rd ’ , in a m ultiple bid form at with an in itial bid, a second bid,
and a final bid. The first bid was open-ended, but based on a ‘Paym ent
C a rd ’ (to avoid the problem o f a high percentage o f protest bids, faced
by early contingent valuation surveys; M itc h ell and Carson, 1989). But
since this could result in a range bias, a second take-it-or-leave-it ques­
tion, based on the initial bid was asked. Possible initial bids were clas­
sified into five class intervals, and the amount used in the follo w -u p
question was tw ice the m id-point o f the class interval. A final question
asked for the m axim um they would pay, and the response to this ques­
tion was taken to be the W T P value.
.
Care was taken for the first value elicited (fo r benefits from bathing
quality w ater in the river) since this was lo be the benchmark valuation.
Once the three questions leading to the m axim um W T P for benefits
from bathing quality were asked, respondents were given the second
map o f w ater quality (1995 level) and asked simply for their m axim um
W T P for the benefits they perceived they would receive (for the entire
household per annum ) as non-users. Re.spondcnts were then given a
map o f riv er water quality as it existed in 1985 and were asked their
m axim um W T P for perceived benefits from this third level o f river
water quality.
T H E Q U E S T IO N N A IR E
'
The questionnaire was developed by researchers o f the Institute o f
Econom ic G row th, in collaboration with M eiroeconom ica o f the United
K ingdom . F o llo w in g an initial workshop to discuss methodology, the
questionnaire was m odified in response to comments from international
experts on the contingent valuation method, and pre-testing was carried
out in six cities in the coUnlry. T he final questionnaire had the fo llo w in g
features.
'
in fo rm a tio n a b o u t G A P
This first section carried three basic kinds o f inform ation about the G A P
thought to be essential to the knowledge base required to answer the
valuation questions; first, an o verview o f the G A P, including the year o f
its inception and target (un ifo rm bathing quality in the river); second, a
88 / Cleaning-up the Ganges
brief summary o f the basic causes for pollution in the river, pointing out
that domestic sewage from large cities was the single largest cause for
pollution (and not industrial pollution, as is commonly understood); and
third, a short account o f the activities o f the GAP, ranging from the set­
ting up o f sewage treatment plants (to combat sewage-based pollution) to
constructing electric crematoria (to control the deposits o f unbumt or
partly-burnt corpses in the river).
- ■
Short, multiple-choice questions followed, designed to deliver addi­
tional information in small doses which are easier to assimilate. These
ranged from whether or not the respondent had visited the river pre­
viously and observed its water quality, to short questions about which
o f the various non-user benefits associated with a cleaner river the
respondents identified with. The latter were carefully worded so as to
make the respondent think about each non-user benefit, which in turn
would be crucial in the subsequent questions on valuation.
P r e fe r e n c e E lic ita t io n
This section carried questions designed lo make the respondent think
about the responsibility o f action to clean the river. In other words, it
aimed to elicit consumer preferences for action to clean the river. The
concluding question, designed to lead on to the valuation section, asked
respondents what role they perceived for themselves as individuals in
the fight against pollution, irrespective o f governmental efforts in that
direction.
Value E lic ita tio n
This was the most crucial section o f the questionnaire and carried ques­
tions asking respondents how much they would be willing to pay for
different levels o f water quality.^ T h e various components of this sec­
tion are described in detail below.
(a) P o s i n g
th e
V a l u a t io n
Q u e s t io n :
The framing of the value
elicitation questions for the valuation of benefits o f improving river
water quality from 1985 to 1995 posed a credibility problem. Since the
G A P and its funding was public knowledge ten years after its inception,
it was difficult to find an appropriate and credible scenario for eliciting
^The choice of asking w illingness-lo-pay questions rather than willingness-toaccept was put forward in the initial design o f the questionnaire by the question-,
nairc preparation team at the Institute o f Econom ic Growth, and ratified by both
M etroeconomica and the inlem alionai expert whose comments were solicited.
.
Measuring Non-user Benefits from Cleaning-up the Canges / 89
payment values from citizens fo r benefits they hod a lre a d y received
(that is for water quality im provem ents between 1985 and 1995). There
was no really satisfactory answer to the natural question o f ‘w illin g to
pay for what?’ . For, i f the ju stificatio n was to pay for improvements in
water quality, respondents could point out that since the improvements
had a lre a d y taken place, where was the necessity for furlher payments?
I f the stated justification, say, was to repay loans taken for the w o rk un­
dertaken in these ten years, there was always the danger o f someone
pointing out that most o f the funds were internally generated, and that
being government allocations there were no interest payments or repay­
ments outstanding.
It was therefore decided to pose the question as an explicit valuation
problem . Respondents were shown a certain map o f water quality (either
o f uniform bathing quality, or riv e r water quality as it was in 1995 or in
1985) and explicitly asked to assume (1) that the,w ater quality shown
was actually obtained at the present, and (2) that they should expect no
further changes in it. They were then asked to evaluate the benefits they
perceived themselves (and their households) as receiving currently, and
would receive, as non-users i f w ater in the river stayed at that particular
quality level. In other words, posing the question in this format meant
that there was a credible reason for soliciting payment: it was a payment
to enjoy the benefits that respondents perceived themselves as receiving
in the hypothetical situation that the river water quality was at a par­
ticular level. Since the various non-user benefits they could expect to
enjoy had already been discussed in detail in the first section o f the ques­
tionnaire, reference back lo the answers given in that section refreshed
their perception o f these benefits. A n d given the introductory statements
in the Value Elicitation Section, on the relationship between willingness
to pay for benefits received, and the explanatory statements on budget
constraints, this seemed a plausible format.
Also, the fact that respondents were explicitly asked to assume that
the water quality shown in the map actually existed, and that they could
expect no further changes’ from it, helped to avoid the tendency among
some respondents, which was detected during pre-testing, to value
worse water quality higher— since (hey imagined they would have to
pay m ore to clean up a dirtier river. The revised statement thus stated;
‘Assume this [map o f either w ater quality in 1985, 1995, or ideal
quality] is the quality o f the w ater in the river right now, and that there
w ill be no further change in the quality , . . . ’ This enabled respondents
to focus on the problem o f valuing their non-user benefits from a river
90 / Cleaning-up ihe Canges
■
o f such w ater quality, instead o f being diverted to the problem o f paying
to clean up the river.
Cb) D e t a i l i n g t h e H v p o T H E T iC A L S c e n a r i o :
T he m ajor difficulty
here was to provide a plausible scenario to the respondents, that, is
describing the hypothetical m arket within which the valuation was to
take place. T h e problem was twofold: (!) to acquaint respondents with
the idea o f stating intentions to pay for indirect benefits from certain
levels o f water quality; and (2) to get respondents to provide a m oney
value for the same.
' !
In order to tackle the first part o f the problem , respondents were
given examples o f private goods to illustrate the link between w illin g ness-tO'pay for benefits received (for example w e are w illin g to pay Rs
X for a pen because w e expect at least Rs X worth o f benefits in return).
Once (his was grasped, the ‘missing m arket’ characteristic o f the public
good o f water quality was explained, which made its valuation possible
only by directly asking respondents what value they would place on the
benefits they received (as non-users). B eing convinced o f the validity
o f providing subjective estimates o f value for non-user benefits from
improved water quality was not, however, sufficient for respondents to
come up w ith an actual m oney value for these benefits.
T he second pari o f the problem was addressed by asking respondents
to consider river water quality as a sort o f public good, in the sense that
it was provided by the governm ent for use by all citizens. A nd for the
various other public goods that the government also provided, such as
educational
facilities,
electricity
and
power,
health
facilities,
and
transport, a rough measure o f the benefits received per household was the
amount the government spent per year per household to provide these
various public goods. A card was then shown to the respondents, detail­
ing the expenditure made by the government in the 1990s per household
to provide various public goods, (o facilitate the estimation o f non-user
benefits from the given map o f river water quality.
I
(c) S p e c i f y i n g t h e B u d i j E t C o n s t r a i n t :
Two other explanatory
statements were made. First, that any payment would have to take in­
come and other spending constraints into account. Second, that w h ile one
could consider the benefits o f good health as ‘priceless’ or ‘in fin ite ’ , in
practice, one could not spend more than one’s income on health facilities,
and in reality, one only spent a small proportion o f one's incom e on such
facilities; and that this was the sense in which the respondents were being
asked to evaluate the benefits they would receive from im proved water
Measuring Non-user Benefits from Cleaning-up the Ganges ! 91
quality, Together with the rem inder o f the existence o f an incom e co n­
straint, this latter clarifica tio n was designed e xp ressly to avoid im p ossib ­
ly high estim ates that m ay be expected in the context o f a rive r w ith
considerable religious and sym b o lic importance.
In addition, all respondents who answered ‘ no’ to the Respondent
Evaluation Q uestion; ‘D o you feel you m ay actually be required to p ay
for water q u ality im provem ents in Oie G an g a?’ , w ere dropped from the
sample. T h e reason for this was that those who did not feel that their
answers had to be constrained by considerations o f actual paym ent m ay
have delib erately overstated their w illingness-to-pay.
(d) T h e C h o i c e
of the
P a y m en t V e h ic l e:
'
'
O f the t h r e e p a y m e n t
v e h ic l e s c o n s i d e r e d , p a y m e n t t o t h e g o v e r n m e n t w a s r e j e c t e d o u t r i g h t
at (he p r e - t e s t i n g s t a g e , g i v e n t h e p r e v a i l i n g a ir o f a l a c k o f c o n f i d e n c e
in th e g o v e r n m e n t ’s a b il i ty to c h a n n e l Ihe f u n d s in t h e r i g h t d i r e c t i o n
w i t h o u t " l e a k a g e s ’. T h e o t h e r t w o p a y m e n t v e h i c l e s tr ie d in t h e p r e - t e s t ­
in g w e r e (i) p a y m e n t to a r e p u t a b l e c h a r i t a b l e o r g a n i z a t i o n , a n d (ii) p a y ­
m e n t to a i o c a l c i t i z e n s ’ g r o u p ( o f w h i c h (he r e s p o n d e n t c o u l d b e c o m e
a m e m b e r ) . A r e p u t a b l e c h a r i t a b l e o r g a n i z a t i o n w a s th e m o s t a c c e p t a b l e
paym ent veh icle and w as therefore chosen.
(e) T h e C h o i c e
of
E lic it a t io n F o r m a t ;
A s s t a t e d e a r l ie r , a n o p e n -
en d ed b id d in g g a m e w as u se d w ith a v a ria n t o f the p a y m e n t c ard , and
r e s p o n d e n t s w e r e a s k e d t w o f o l l o w - u p q u e s t i o n s t o t h e i r in itia l ( n o n ­
z e ro ) b i d , o n e o f w h i c h w a s a c l o s e - e n d e d q u e s t i o n . T h e g e n e r a l f e a t u r e s
o f the e l i c i t a t i o n f o r m a t a r e d e s c r i b e d in g r e a t e r d e ta il b e l o w , w h i l e t h e
n a tu r e o f th is p a r t i c u l a r e l i c i t a t i o n f o r m a t is p r e s e n t e d in T a b l e 5 .1.
A n open-ended bidding game is where respondents are in itia lly
asked 'H o w much w ould you pay (fo r the good in question]?’ , whereas
in a close-ended bidding game, respondents are in itiaJly asked 'W ould
you pay R s X (fo r the good in questio n }?’ . T h e in itial questions in an
open-ended bidding format can be follow ed up (in the case o f a non­
zero in itia l bid) w itli (further questions leading up to) the fin a l question:
‘ What is the m axim um you would pay [for the good in q u estio n ]?'. In
the case o f close-ended bidding games, the initial question can be fo l­
lowed up w ith further questions ba.sed on the answer to the in itial ques­
tion. I f the answ er to the in itia l question was a ‘Y e s ’ , then the fo llo w -up
question could ask; 'W ould you pay R s X H- an increm ent [fo r the good
in questio n ]?’ ; but i f the answer to the in itial question was a ‘N o ’ , then
the fo llo w up question could be: ‘ W ould you pay R s X —some fixed
amount [fo r the good in question]?’
92 / Cleaning-up ihe Ganges
Although there is currently a debate on whether open-ended or closeended bidding should be used, there appears to be insufficient cause to
reject the form er in favour o f the latter? But while the use of the openended bidding game seems justified, there is a longer-standing problem
with open-ended questions, which is the high proportion o f ‘zero bids'
they evoke, partly because o f the difficulty respondents face in pulling a
number out o f their heads. This problem has however been addressed
successfully by M itc h ell and Carson (1981, 1984), by using a ‘Payment
Card’. A ‘Payment Card’ carries values o f comparable public goods (say,
paid for by tax revenues) intended to provide respondents with a rough
idea o f the range o f comparable benefit estimates. The use o f a ‘Payment
Card’ helps focus respondents and elicit .a much higher proportion o f
valid (non-zero) initial responses. But the open-ended bidding game
backed by a ‘Payment C ard’ has been criticized on the grounds that the
resulting values tend to be lim ited by the range presented in the card.
The elicitation formal used in this survey began by describing the
good in question and the logic o f eliciting willingness-to-pay estimates
from the general public (described above). Respondents were then
shown a map o f the river Ganga with uniform bathing quality water and
asked; ‘H o w much would you pay per year for the non-user benefits
^The oldest and most w id ely used format, the open-ended bidding game (where
respondents arc sim p ly asked to stale a value) has been criticized on one major
count: a ’starting point bias' can result i f starting points are given (e.g. respondents
arc sim ply asked whether or not they are prepared lo pay a particular price for the
good in question). M itchell and Carson (1981, J984) suggested tackling this
problem by using a 'payment card ’ with a range o f certain comparable values, but
in the use o f a set o f values on a p.iymcnt card, ilie mere presence of these values
on a card can lead to a ‘ range b ias’ , where all values given by the respondents are
contained w ithin the range o f numbers given on the card. It was lo try and
overcome tliis problem tliat the present study used a payment card to gel initial
values and then asked two follow -up questions to help respondents reach a final
value. A no ther point o f debate is the use o f close-ended versus open-ended bidding
formats, with the B lu e Ribbon Panel o f the United States National O ceanic and
Atm ospheric A dm inistration (N O A A ) rccortimending the use of close-ended
bidding games as the elicitation format, on the grounds that ’ there is no strategic
reason for the respondent to do otherwise than answer truthfu lly’ (A rro w et a i ,
1992: p. 2 1 ). H ow ever, both Fish e r (1996: pp. 2 4 -6 ) and Diamond (1996: p. 63)
argue that 'the case for closc-endcd C V responses being free o f strategic bias has
not been made either in theory or by em pirical findi ngs', Thus, w hile not defending
open-ended bidding formats, lliey merely iilusUate that the altenialive is not free
from the same defect. The choice between the two is therefore not as clear-cut as
once assumed.
Measuring Non-user Benefits from Cleaning-up the Ganges / 93
you (and yo u r fa m ily ) w ould derive from a river with this level o f water
q u ality?'. T h e present format also sought to correct for possible range
bias by adding two fo llo w -up question.s to the initial open-ended ques­
tion. T h e first asked a closed-ended question b a se d on tlie a n s w e r to the
in itia l o p e n -e n d e d q u e stio n . T h e questionnaire had a table detailing ihe
amount to be asked in the first follow -up question, based on the amount
offered as the in itial bid. T h is w as follow ed by a second open-ended
follow -up question lhat asked the m axim um amount the respondent w as
w illin g to pay fo r the non-user benefits o f a riv e r Ganga w h ich had been
cleaned up to bathing q u a lity throughout. T h e bidding fo rm al is
specified in greater detail in T a b le 5 .1 .
Fo r the other two leve ls o f water quality (1995 and 1985), o n ly the
final open-ended question w anting to know the m axim um w illingnessto-pay w as asked.
T
T h e E lic ita tio n Fo rm a t:
Initia l question
(open-ended with a
V a ria n t o f the
payment card)
How m uch m o n ey
would you and
your family pay
per year lo enjoy
the non-user
benefits o f a river
G an ga w hich is o f
batliing quality
ihrou about?
a
DLE 5.1
Structure o f ihe B id d in g G am e
rollow -tip qitesiions
In itia l
(non-zero)
Rs 0 -2 5 0
R s 25CH500
Rs 500-1000
R s 1 0 0 0 -2 0 0 0
A b o v e R s 2 000
Question ]
(close'eiided but
based on Ih e initial
response)
Question 2
(open-ended)
Since you are
probably doing such
a valuation c.scrckc
for the first time, let .
me ask you:
Would you pay Rs
300
750
1500
3000
5000
per year on behalf o f
yo urself and your
family in order to
enjoy the benefits o f
a river Ganga that is
o f bathing quality
througlicul?
W h at is the
m a x i m u m you
w o u ld pay forihcsc benefits?
94 / C le a n in g -u p (h e G a u g e
S o c io -e c o n o m ic D e t a ils
T h e fourth section o f the questionnaire was designed to c o llec t in fo rm a ­
tion on s o c io -ec o n o m ic variables to be used in the regression estim ation
o f the valu ation fu n ctio n . A p a rt from Ihe nam e o f the respondent and the
address, in fo rm a tio n was collected on age, edu catio n al le ve l, occupation,
size o f the household (both abo ve and below the age o f 18 years), and
gross annual household in c o m e from all sources. T h e last was posed al­
tern atively in the fo rm o f bands o f possible incom es, w h ic h the respon­
dent could choose. G iv e n the p ro c liv ity o f u nderestim ating incom e in the
country, the subsequent analysis took the upper lim it o f the incom e class
chosen as represen tative o f the incom e o f the respondent.
R espo n den t's E v a lu a tio n
Several questions w ere asked in tlris section as a fo llo w -u p lo the ques­
tions posed in the previo u s sections. In particu lar, they asked fo r the
respondent’s e v a lu a tio n o f the clarity o f the e n u m e ra to r’s presentation
o f the q uestionnaire, the exlen! to which the respondent b elieved the
answers p ro vid e d w o u ld in flu en c e policy and affect clcan -u p o p era­
tions, and w h e th e r o r not the respondent b elieved actual paym ents
would be asked for. These helped subsequently to screen out question­
naires con tainin g responses w hich may be biased for a lack o f c la rity o f
exposition by the enum erator.
E n u m e ra to r's E v a lu a tio n a n d D e c la ra tio n
Tw o questions w e re p ut to the enumerators at the end o f the in terv ie w ,
(0 ascertain (he a ttitu d e and cap ab ility o f the respondents to answ er the
elicitation questions. T h e enum erators w ere asked to describe the kind
o f effo rt the respondents m ade to focus on the hyp o th etical scenario and
lo understand the c on tex t and purpose o f the e lic ita tio n questions. Those
questionnaires w h e re enum erators felt the respondent eith er did not pay
sufficient a tten tio n to thp v alu a tio n questions or did not understand the
questions w ere e lim in a te d fro m the sample subsequently.
Further, enu m erato rs w e re asked to sign a declaration stating that the
in terv ie w had been conducted honestly and in accordance w ith the in ­
structions they had received d u rin g (heir training . T h e basic purpose o f
these questions was lo in s til a sense o f responsibility in the enum erators
and to m ake them e xe rt th e ir utm ost lo e lic it accurate responses. Since
(he questions probe sub jective evaluations by the respondents, there are
no right or w ro n g answers to any o f the questions, and experienced but
M easu rin g Non-user Benefits fro m Cleaning-up ihe G an ges
/
95
dishonest e n u m e ra to rs could h ave fille d in each q u estio n n aire on th e ir
o w n w ith o u t a c tu a lly h av in g carried out the in te rv ie w s . T h e o n ly w a y
to check this is b y close supervision. T h e questions in this section o f the
survey and the d e c la ra tio n a cc o m p a n y in g th e m a ttem p t to check such
b eh a vio u r on th e p a rt o f the e n u m erato rs. T h e s electio n o f en u m e ra to rs
is ano th er v ita l a id lo a ve rtin g such b eh aviou r. T h is is fu rth er e x p la in e d
below .
:
THE SAMPLING
B e in g a n a tio n w id e survey, the c h o ic e o f the s a m p le was an im p o rta n t
one. T h e re w e re , h o w e v e r, constraints on the e x te n t o f c o v erag e o f the
w h o le p o p u la tio n posed by the a v a ila b le resources o f tim e and fu n d in g .
In a d d itio n , th e re w as the p ro b le m o f g e ttin g m e a n in g fu l responses
fro m som e g ro u p s in the country'. F o r tw o m a jo r reasons, therefo re, the
sam ple was re s tric te d to urban p o p u latio n s in the m a jo r cities in the
country. F irs t, c o n tin g e n t v alu a tio n in v o lv e s c o n s id erab le h y p o th etica l
reasoning, w h ic h , it was fe lt, w o u ld be d iffic u lt fo r illite ra te respondents
to fo llo w and use. S econd, w iilin g n e s s -to -p a y is constrained by in c o m e ,
and i f in c o m e s are lo w or al subsistence levels, it m ay be d iffic u lt fo r
respondents to tru th fu lly reveal p o s itiv e values. F o r these reasons, it
was d ecid ed to re s tric t the target p o p u la tio n lo the lite ra te and e m p lo y e d
p o p u la tio n in m a jo r cities (p o p u la tio n o f 1 m illio n and a b o ve) in the
country.
C itie s w e re s e le c te d to a ch ie ve m a x im u m g eo g ra p h ica l c o verag e. A l ­
though it w o u ld h a v e been id eal to c o v e r all the stale capitals in the
country, re so u rc e constraints m ean t that o u ts id e the m a jo r m e tro p o lita n
centres c o v e ra g e h ad to be restricted to s im p ly ensuring that the fo u r
g eo g ra p h ica l zo n es w e re a d eq u ately c o v ered . F o r this reason, the c ities
o f Trivandrum (T h iru v a n a n th a p u ra m ), B a n g a lo re , and H y d e ra b a d in the
south, B a ro d a in the w est, and A lla h a b a d , L u c k n o w , and K a n p u r in the
north were c h o s en , apart from the m e tro p o lita n c ities o f D e lh i, C a lc u tta ,
and C h e n n a i. In it ia lly , 2 5 0 q uestionnaires per c ity w e re plann ed , to ta ll­
ing 2 0 0 0 , b ut in fo rm a tio n fro m o n ly 1 8 7 6 fiile d -in questionnaires w as
entered in to the spreadsheet, the rest b e in g e ith e r protest bids o r in c o m ­
p le te ly fille d -in questionnaires.
W ith in each c ity , the sam p ling schem e was designed to c o n tro l fo r
g eo g ra p h ica l spread and in com e categ o ries. A c c o rd in g ly , the city w as
d iv id e d in to fo u r geo grap hical zones, and households in three in c o m e
categories
o f h ig b -in c o m e , m id d lc -in c o m c ,
and
lo w -in c o m e
groups
w ere s am p le d . T h e sam pling in each g eo g ra p h ica l zone and in c o m e
96 / Cleaning-up the Ganges
group was done by taking every alternate household along a street or in
a com plex o f residential flats. Although this is not a stratified random
sample as defined in textbooks, given the size o f the target population
and the enormous costs o f inform ation and processing involved in
working out population strata, and thence, sample strata (especially if
the strata are as diverse as age, sex, occupational groups, social classes
or castes, and relig io n ), the m ethodology adopted appeared to be a costeffective means o f getting a fairly representative sample,'* Also, for
reasons m entioned above, only the literate and the employed were
chosen from among the urban population.
The choice o f enumerators was restricted to college and university
students for a variety o f reasons. A part from the fact that such a survey
would give young students (o f Econom ics and Statistics) valuable prac­
tical experience w ith conducting surveys, and that it provided an intro­
duction to applied environm ental economics to interested students, it
also avoided problems o f dishonest reporting o f the sort mentioned
above.^ Each enum erator was paid Rs 25 per questionnaire, fully fille d in, plus Rs 10 per questionnaire for local travel costs.
The fo llo w in g section presents the analysis o f the data and the results.
E S T IM A T IO N R E S U L T S
There are three sets o f results. First, the calculation o f the mean w illingncss'to-pay (W T P ). Second, iltc extrapolation o f these average W T P
would have been preferable to use electoral rolls to identify the target
population and make the sample selection completely random. This, unfortunately,
could not be done, given the time constraints.
*lt is interesting to note that Mitchell and Carson (1995) recommend the use of
professional interviewers. They note;
We advocate the use of professional interviewers because they are instructed to
adhere strictly to the text of the instrument, whereas graduate students or other
types of interviewers who might be recruited on a one time basis are easily templed
to adapt the wording to the respondent or to explain the meaning of text which
puzzles the respondent. T liis type of intervention destroys the purpose o f a survey
which is to obtain information from a sample of people in response to material
which is presented consistently, [p. 28]
They note, however, in iheir earlier work (1989) that while the field investigating
manuals state that ‘ad-hoc explanations o f what a question means, however
well-intended, destroy comparability . . . . S tu d ie s h a v e s h o w n that th e se g o a ls a re
not c o n s is te n tly m et, even w ilh w e ll- tra in e d in te rv ie w e rs ' (p. 240; emphasis
added).
Measuring Non-user Benefits from Cleaning-up (he Ganges
/
97
estimates to the population. T h ird , the calcuJahon o f increm ental W 7 T
for d iffe re n t sets o f changes in w ater quality.
M E A N W IL L I N G N E S S - T O - P A Y
D ata from (he city sam ples (D e lh i, Chennai, C alcu tta, T h iru va n an th apuram , B aroda, B an g a lo re, H yd erab ad , V ijay aw ad a , K an p u r, L u c k n o w ,
and A lla h a b a d ) w ere pooled to get an ‘A ll N o n -u se rs ’ sam ple. T h is data
was screened to e lim in a te in com plete questionnaires in clu d in g protest
(zero ) bids and those w h ic h did not reflect the budget constraint. It was
also screened to e lim in a te questionnaires where respondents w e re as­
sessed by the enum erators as either not understanding the valu atio n
question or not g iv in g it sufficien t consideration. T h is reduced the fin al
sam ple size from
1 8 7 6 to 8 17 . W h ile this means that roughly 5 0 per
cent o f the sam ple had to be dropped, (his is not unusual in C o ntin g ent
Valuation Surveys, although the average figure is m uch lo w e r (usu ally
around 1 0 -2 0 per cen t). B u t the decision lo screen the data tJioroughly
was taken w ith a v ie w to presenting as accurate an estim ate o f non-user
benefits as possible. In any case, a total sample o f o ver 8 0 0 observa­
tions is usually deem ed adequate for a contingent valu ation survey,^
H ousehold values for the benefits from three d iffe re n t levels o f w ater
quality (best or b ath in g quality, 1995 quality and 1985 q u a lity ) are c a l­
culated in four d iffe re n t ways;
(1 ) as the sam ple mean;
(2 ) as the sam ple m edian;
(3 ) by estim ating a regression equation w ith W T P for eacli level o f
water quality regressed on a vector o f socio-econom ic variables and
du m m y variable, and using the average values o f the regressors lo
generate estimates o f the dependent variables; and
^ h e largest sam ple size reported in a list of selected C V studies in M itchell and
Carson (1989: A ppend ix C , Table C -1 . p. 363) is 748. See M itchell and C arson
(1989). chapter 12, for a thorough discussion o f ‘non-sam ple response’ and
‘sample selection’ biases. Their Table 12-3 on page 281 records response rales o f
between 8 and 93 per cent, but these have not been corrected for questionnaires
where the responses lo the C V elicitation questions were m issing. T h e final per
centages, thus, would be lower. But note that in the ca.se o f the present survey, the
sample of useable questionnaires was also reduced because of internal checks to
ensure that the budget constraint did actually constrain the responses to the
w illingness-to-pay questions. The sample size also corresponds roughly to a
situation where (a) 95 per cent o f the time the estimated mean W T P is w ithin 20
per cent of the true W T P , and (b) the cocfllcicnl of variation is about 3.0 (M itchell
and Car.son, 1989: pp. 2 24-5).
98 / Cleaning-up ihe Ganges
(4)
by e s tim a tin g a regression equation w ith pooled data on W T P for
all levels o f w a te r q u ality regressed on an in d ex o f w ater quality, a v e c ­
tor o f s o c io -ec o n o m ic variables and d u m m y variables, and using the
average values o f the regressors and the actual value o f the w ater
quality in d e x to generate estimates o f the dependent variable.
T he s am p le m ean , being nearly identical to the estimated m ean, is
not reported here. T h e sample m edian is usu ally used to p ro vide a
measure o f c en tral
tendency
for the sam p le, w hen
the sam ple is
believed to be h ig h ly skew ed, since it less in flu en ced by outliers.
H en ce, three estim ates o f household W T P fo r each o f the three w ater
quality levels, nam ely, (1 ) B E S T M A X for B est or B athing Q u a lity , (2 )
C U R R M A X for C u rren t o r 1995 W ater Q u a lity , and (3 ) P A S T M A X for
Past or 1 98 5 W a te r Q u a lity, are given.
E C O N O M E T R I C M O D E L W IT H O U T W A T E R Q U A L I T Y
In the regression equation estim ated for each level o f w ater q u ality, the
dependent v a ria b le is the W T P elicited fro m the respondents for that
p articular level o f w ater quality. T h e vector o f socio-econom ic variables
on w hich
these are then regressed includes incom e, age, education
level, and household size, w h ile dum m ies w ere added for specific
responses g iven in the questionnaire and for cities where the respon­
dents liv e (described in detail below ).
T h re e fun ctio nal forms were tried for each equation— iJic C obb-D ouglas
form (in logarithm ic-linear form), a modiricd C obb-D ougias form (where in­
come and age entered in squared form ), and tlic Translog (flexible) functional
form.^ T h e final equation used in the calculation o f the mean value was
chosen on the basis o f the highest A djusted R " and F-staiisiics (see fo o t­
note 12 fo r an exp lan atio n o f these statistics). T h e full specification o f
each equ ation in genera! and in the C o b b -D o u g la s form follo w s.
V h e T ra n sio g form does’ not seem to have been used in Ihc specification o f
W T P lu n ciio n s in previous C V studies. The ch ie f reason for using the Translog
specification in the present study is lo see if non-linearities in the functional
relationship could be captured. There arc, however, standard cautions to be applied
to these estim ates. The main caveat is that these results hold only locally, i.e. within
a sm all neighbourhood of the point of langency between tlic possibly non-linear
function and the tangent lo the function at llie point o f evaluation. The Translog
specification is. as is well known, the linear form o f a second-order T a y lo r
expansion at the point o f tangcncy.
Measuring Non-user Benefits from Cleaning-up the Ganges / 99
G e n e ra l F o rm
.
W T P = / ( C O N S T A N T , I N C O M E , A G E , S IZ E , HDU, IN F _ C L , VISET,
B _ S T A N D , D _ S T A N D , CIT EN NAr, D E L H I , T V M , B L E ,
B A R O D A , KLA, H Y VJ,
(5.1)
w h e r e W T P is B E S T M A X for best or b a th in g w ater quality;
C U R R M A X for c u rre n t o r 1995 q u a lity (with G A P ) ; and
P A S T M A X for past or 1935 quality.
C o b b ~ D o u g la s L o g a r it h m i c L i n e a r F o r m
B L O G (or C L O G or F L O G ) = a + a , IL O G +
ALOG + a s SLOG
+ Ge E L O G + Pi V IS IT + P 2 I N F „ C L
+ P 3 B _ S T A N D + P4 D „ S T A N D
+ 5, C H E N N A I +
.
+
64
BLE+
+
6 7 HYV
65
§2
DELHI +
BARODA +
6
63
TVM.
^ KLA
+ E,
(5.2)
where
B L O G (o r L o g B E S T M A X ) = L o g ( W T P for Best Q uality);
C L O G (or L o g C U R R M A X ) -
L o g ( W T P fo r 1995 Quality);
P L O G (or L o g P A S T M A X )
=
L o g ( W T P fo r 1985 Q uality);
I L O G (or L o g I N C O M E )
= L o g (per c ap ita a n n u a l h o u se h o ld
income from all sources);
A L O G (or L o g A G E )
= L o g ( A g e o f the re sp ond ent);
S L O G (or L o g S I Z E )
= L o g (Size o f the h ou se h o ld ; with
m e m b e r s b e lo w llic age o f 18
c o n v erted to adult e q u iv a le n t units);
E L O G (or L o g
= L o g (E d u c a tio n level o f the r e s p o n d ­
ent, in years)®
EDU)
^
■
INF_CL
= D u m m y varia ble : W h e t h e r r e s p o n d cirts had visited the G a n g a in the
past 10 years: YE S = I; N O = 0;
- D u m m y variable: W h e t h e r or not
re sp o n d en ts had he ard a bou t the
G a n g a A ctio n Plan; Y E S = I; N O = 0;
*For the iranstog funciioii.il form, Ihe following additional variables were used;
ILO G I = (IL O G X IL 0 G V 2
IL O G A = ILO G X A LO G
.
I L 0 G E = ILO G X F L O G elc.
.
100 / Cieaning-up the Ganges
B „STA N D
=
D u m m y variable:
W hether respond­
ents felt bringing water quality up to
bathing standards was w o rthw hile,
irrespective o f cost; Y E S = 1; N O = 0;
D -S T A N D
=
D u m m y variable:
W hether respond­
ents felt bringing water quality up to
drinking standards was w o rth w h ile,
irrespective o f cost; Y E S = I ; N O = 0;
C H E N N A I, D E L H I etc.
where
T V M is Trivandram
B L E is Bangalore
= D u m m y variables: W hether the respondent resided in lhat particular
city: Yes = 1; N o = 0.
K L A is Calcutta
H Y V is H yderabad
In each case tiie regressions were analysed using O rdinary Least
Squares (O L S ) with corrections made for hetcroscedaslicity when it
was detected (using a B reu sch -P ag an Chi-Squared Test). T h e best
results from each o f the three specifications tried for each equation are
presented in Tables 5.2 lo 5 .4 , and Table 5.6 gives the mean W T P es­
timated from each equation. T h e best results in each case were from
from the Translog specifications o f the W T P functions.
There are several points o f interest in the estimates o f the three W T P
functions. First, the regression equations have low Adjusted
values.
This usually indicates that the estimated equation is not a good fit to the
data.^ H ow ever, it must be borne in mind that the reported estim ation
results are for cross-section data, which do not usually give as high A d ­
justed
values as time-series data. S till, the generally acceptable range
being 20 per cent and above, these regressions do not represent a par­
ticularly good fit to the data.
Second, very few o f the variables estimated are statistically sig­
nificant (indicated by the lo w values o f the relevant t-statistic, and by the
absence o f the asterisks ih a fd e n o te significance at either the 1 per cent,
the 5 per cent, or the 10 per cent error levels). In particular, the incom e
variable is not statistically significant, and does not have the correct
N o te however, (hat the F-statistics are strongly significant in all cases. The
F-statislic reports on the overall significance of the regression equation. It tests
the (null) hypothesis that the estimated coefficients are equal to zero. Any value
of the F-slniistic greater than 3 indicates that this hypothesis is strongly rejected
and that the estimated regression is statistically significant.
Measuring Non-user Benefits from Cleaning-up the Ganges / 101
T a b l e 5.2
Estimalion Results for Willingncss-to-pay for Best or Bathing Quality
Dependent variable:
F-statislic (zero slopes):
B LO G
20.9934
8.76810
Variable
No. of observations:
Adjusted R ?
Econometric Package:
Coejficient
817
18.4964
T S P 4.3
l-sitttistic
C O N STA N T
22.187500
1.22247
ILO G
-0.400438
-0.28322
A LO G
-14.502600+
-3.27280
SLO G
6 .I2 I6 8 0 t
1.92340
E LO G
4.627910
0.60973
ILO G I
0.180824
1.53299
ILO C A
-0.014331
-0.08077
ILO G S
0.201127
1.10851
iL O G E
-0.482672
-1.09420
A LO G A
2.817740+
-0.449104
ALO G E
1.596020
1.52355
SLO G S
0.516816
1.14340
SLO G E
-2.48S3G0*
-2.69701
ELO G E
-0.648300
-0.56828
-1,30465
V IS IT
0.162346
1.61597
b\'F_C L
0,327139t
2.67511
0.120155
0.65704
.
D _STA N D
0.124250
1.45915
C H EN N A I
0.581799+
3.42109
D ELH I
-0.2922184
-2.15646
TVM
,
0 .1 0 3 6 6 4
-0.52814
B LE
'
0.09 8207
0,59785
BARODA
1.42000
0.216923
KLA
-0.593361*
^ .5 1 2 5 2
H YV
-0.022829
-0.11628
Noter:
Errors are heleroscedaslic-consistcnt (HCTYPE
‘ denotes significance at the 1 per cent error level.
.
Idcnolcs significance ai ihc 5 per cen! error level,
+denoies significance al ihc 1 0 per ccril error level,
S U m d a rc i
■
■
3.28219
A LO C S
B^STAND
■
= 2).
■
102 / Cleaning-up ihe Ganges
T a b l e 5.3
.
Eslim a tio n R e s u lts for W ii)ingness-to-pay for Current or 1995 Q u ality
Dependent variable;
R^;
F-sCaiistic (zero slopes):
Variable
C LO G
iS.2658
7.07084
No. of observations:
Adjusted
Econometric package::
817
15.6825
T S P 4 .3
CoeJftcieiU
{-statistic
CONSTANT
11.999700
0.64047
ILO G
•D.460125
-0.30164
A LO G
-9.G28480t
-2.31354
S LO G
6.476950t
1.93079
ELO G
4,832170
0,60945
JLO G i
0,193817
1.57214
-9.085806
-0.47969
JLO G A
ILO G S
0.199986
1.07353
IL O G E
-0.432471
-0.93856
A LO G A
1.987450t
ALO G S
0.518885
1.53184
ALO G E
-1.274220
-1.24617
2.34318
SLO G S
0.424339
SLO G E
-2.495280?
-2.64351
ELO G E
-0.408042
-0.34718
0.92987
V IS IT
0.154259
1.43517
IN F _ C L
0.271453? ■
2.15981
B^STAND
0.137684
0,75519
D _STA N D
0.069910
0.79524
C H EN N A I
0.755448*
4.20909
-D-284111?
-1.85809
D ELH I
TV.M
0.056284
0.27586
B LE
0.243771
1.45623
BARODA
0.097441
K LA
0.558114*
-4.22443
H YV
0.121305
0.61557
Nntes:
Sunciard Errors are heieroscedasiic-consislent (HCTYPE = 2).
♦denotes significance at the 1 per ccnl error level,
tdenotes signincatice al ihc 5 per ccn! enor level,
Jdcnoics signiricancc al the 1 0 per cent error level.
0.59576
M e a s u r i n g N o n - u s e r B e n e f i t s f r o m C l e a n i n g - u p th e G a n g e s / 103
T a b l e 5 .4
Estimation Results for Willingncss-lo-pay for 1995 Quality
Dependent variable:
R ':
F-statis(ic (zero slopes):
PLO G
15.5058
4.23548
No. of observations:
Adjusted
Econometric package:
C oejjicien t
Variable
■
26.043700
C O N STA N T
1.526550
ILO G
603
11.8449
T S P 4.3
t-siatistic
1,18962
0.78344
ALO G
-16.724600*
-3.46321
SLO G
9.8436I0t
2.64280
ELO G
^ .794390
ILO G I
O.OOOS70
0.00623
-0.090524
-0,38705
-0.067364
-0.31384
-0.303969
-0.59221
ILO GA
[LOGS
.
ILO G E
2.6247001
A LOG A
-0.597472
ALO G S
ALO G E
3.0407701
-0.54159
2.61340
-1,40539
2,41785
SLO G S
-0.120832
-0.22846
S LO G E
-2 .4 l3 1 3 0 t
-2.23986
ELO G E
-O.OS7979
-0.06357
V IS IT
0.346'152t
0,28377
1NF_CL
0.344856t
2.32958
B_STA N D
0.156320
0.72446
D_STAN D
0.177749^
1.69830
C H EN N A I
0.748247*
3.02631
D E LH I
0.050339
0.26795
TVM
0.1S8921
0.89175
0.389S11 +
1.89416
'
BLE
BA R O D A
0.370622
KLA
-0.355886t
H YV
0.428433
Niiles:
StancUird Errors are heterosccdaslic-consislent (HCTYPE = 2).
*dcnoies significance at the I per cent error level,
tdenote.s significance al tlic 5 per cent error level,
jdenolcs significance al the 1 0 per cent error level.
1.37254
-2.37680
1.37432 ■
104 / Cleaning-up the Ganges
(p o s itiv e ) sign in all cases. S ince in com e is expected to be p o sitiv ely
related to the w illin g n ess-lo -p ay, and s ig n ific a n tly so, this indicates fu r­
ther tliat the estim ation does not represent a good fit to the data.
T h ird , the variable representing the age o f the respondents is strongly
n eg a tive ly related to the w illin g n es s-to -p ay , albeit in a regression w hich
m ay not h av e a very good o v e ra ll fit w ith the data. T h is w ould indicate
that y o u n g e r respondents
tend to g iv e h ig h er values
benefits. H o w e v e r, since the cross-term
(A L O G A )
for non-user
in the Translo g
s pecificatio n is strongly p ositive in all cases, there could be a n o n -lin e a r
relatio n ship betw een age and w illin g n es s-lo -p a y . T h e best m easure o f
the responsiveness o f W T P to the v ariab le A G E , nevertheless, is the
elasticity o f W T P to A G E . T h e e lasticity in (he case o f the first regres­
sion e stim a tio n (for Best or B ath in g Q u a lity in T ab le 5 .2 ) is - 1 0 .5 5 2 3 ,
in d icatin g (hat i f age goes up by 1 per cent, w illin g n es s-to -p ay fails by
10.55 p er cent.
T h e d u m m y variables sho w that p rio r in fo rm atio n about the G anga
A ctio n P la n increase the W T P o f the respondents, but the v ie w that
either b ath in g o r d rin kin g q u a lity w a te r is a w o rth w h ile ob jective ir­
respective o f cost docs not have a statistically s ig nificant im pact on sub­
sequent W T P olfers. In terms o f the city d u m m y variables, the results
show that respondents fro m C h en n ai tend
to give higher estimates
o f \? T P than those from other cities, w h ile the D e lh i and K a n p u rL u c k n o w -A lla h a b a d respondents tend to g iv e lo w e r estimates.
R e p la c in g the regressors (rig h t-h an d side variables) w ith their m ean
values and exp on en tiatin g the rig h t-h an d side o f the regression equa­
tions w ill y ie ld the m ean values o f the left-h an d side dependent v a ri­
ables that w e are interested in, n am ely, B E S T M A X , C U R R M A X , and
P A S T M A X . T h e results are g iv e n in T ab le 5 .6.
Ih e r e is, h ow ever, another w ay o f d e riv in g the m ean w illin g n es s-to pay, using w ater q u ality as an e x p lic it variab le in (he right-hand side o f
the regression equation. T h is is described in the fo llo w in g m odel.
E C O N O M E T R IC M O D E L W IT H WATER Q U A L IT Y
T w o n ew variables are created in this m o d el. F irst, a v ariab le called
Q U A L I T Y is created as an index o f riv e r w ater q u ality. T h is index is
calcu lated using the statistics on B O D (B io lo g ic a l O x yg e n D e m a n d )
m easured at d iffe re n t points along the G an ga in the years 1987 and
1996 (th e tw o years closest to the years chosen, fo r w hich com plete
data was
available). This
w eig h ted average
was suitably calibrated to
Measuring Non-user Bencfus from Cleaiiiiig-iip the Ganges! 105
increase with a fall in B O D , or an increase in river water quality (see
Appendix 5.2 for details of the calculation o f this index). The values
taken by the index in the three scenarios are:
Best Quality = J 00.00;
1995 Quality = 48.63;
1985 Quality = 31.46.
The second new variable is the dependent variable in the regression
equation, L o g (B ID ) (or L B ID ), where
B ID
B ID
B ID
is B E S T M A X
is C U R R M A X
is P A S T M A X
when Q U A L IT Y is 100.00;
when Q U A L IT Y is 48.63;
when Q U A L IT Y is 31.46.
The sample used in the regression, thus, is three-times the A ll Non­
users sample used in the previous regressions. 3'he actual specification o f
the regression equation (in Cobb-Douglas logarithmic linear form) is:
L B ID = a + Oq Q LO G + a , IL O G + a,,, A L O G + as S L O G
■
+ C e E L O G + P i v i s i t + P j IN F _ C L + pj B ..S T A N D
+ P 4 D .S T A N D + 5 1 C H E N N A I +
+
54 B L E
62
D E L H I +6 3 T V M
-H5 ; D A R O D A -r 5 , K L A + 6 , H Y V + e;
(5.3)
where
Q LO G
= Lo g o f Q U A L IT Y as defined above
IL O G (or Lo g IN C O M E) = Lo g (per capita annual household
income fioin all sources)
A LO G
(or Lo g A G E ) = Log (.Age o f the respondent)
SLO G
(or Log S IZ E ) = Lo g (S ize of the household: will]
members below the age of 18 converted
_
to adult equivalent units)
E L O G (or Lo g E D U )
= Lo g (Education level of the respondent.
V IS IT
= Dum m y variable; Whether respondents
; had visited the Ganga in the past 10 years:
Y E S = I ; NO = 0
= Dum m y variable: Whether or not respon­
dents had heard about the Ganga Action
Plan; Y E S = 1; NO = 0
•
in years)
IN F _ C L
B _S TA N D
. = Dum my variable; Whether respondents
felt bringing water quality up to bathing
standards was worthwhile, irrespective o f
cost; Y E S = 1, NO = 0
Cleaning-up the Ganges
106 /
D _STA N D
= D u m m y varia b le; W hether respondents
fe ll bringing w ater quality up to drinking
standards was w orthw hiJe, irrespective o f
cost; Y E S = 1; N O = 0
C H E N N A I, D E L H I etc.
= D u m m y variab les; W hether the respond­
ent resided in that particular c ity ; Y E S =
1; N 0 = 0.
T h e results from this regression are detailed in Table 5.5.
T A n u E 5.5
E stim a tio n R esu lts for M odel with Q u a lity as a Regressor
Dependent variable;
RT
F-slaiisiic (zero slopes):
L B ID
33.4308
69.6797
No. of observations:
Adjusted R^:
Econoitielric package:
2237
32.95110
T S P 4 .3
Variable
C o cjjicien t
l-sialisiic
C O N STA N T
-3,931600*
-5.08746
Q LO G
1.473S50*
26.77850
[LO G
0.2S5526*
6.17231
A LO G
-0.373782*
-4.24718
S LO G
0.236715*
2.99498
E LO G
0.352119*
1.61129
V IS IT
0.226198*
3.35536
INF^CL
0.292159*
3.83297
B^STAND
0.176796
D _STA N D
0.1258441
1.61140
2.35420
C H EN N A I
D ELH I
TVM
BLE
BARODA
K LA
;
H YV
Notes:
0.784868*
6,78864
-0.173690t
-1.91892
0.098726
0.84003
0.207553t
2.01479
0,2186281
-0.540680*
-6.77557
0.2536G2t
2,02352
2.03979
Standard Errors arc hclcroscedastic-consislcnl (H C rY l’ E = 2 ).
'denotes significance al llie \% error level,
tdcnotes significance al the 5% error level,
tclenoles significance at the 1 0 % error level.
These results have several noteworthy features. F irst, the value o f the
Adjusted
is sig n ifican tly higher than those obtained for the e arlie r
Measuring Non-user Benefits from Cleaning-up the Ganges i 107
regressions (fro m the m odel w hich did not take riv er w a te r q u a lity as
an in dependent variable or regressor). T h e value for the current regres­
sion is w e ll w ith in the acceptable range for cross-sectional data.
Second, alm ost all the variables are hig h ly statistically significant
(in d icated by the high t-ratios). A lo n g w ith the fact lhat the A djusted
is high (as w e ll as the F -ratio , w hich represents the overall significance
o f the regression), these high t-ratios m ake the interpretation o f the
results m o re m eaningful.
T h ird , all the variables have the expected sign; incom e is expected
to be p o s itiv e ly related to W T P , as are the size o f the household and the
educational level. T h e educational level m ay also be interpreted as a
proxy fo r the environm ental awareness o f the respondent, although tins
relationship need not obtain in general.
T h e e la s tic ity o f W T P w ith respect to incom e is the valu e o f the es­
tim ated c o e ffic ie n t c f the variable IL O G (the natural lo g arith m o f an ­
nual gross household incom e from all sources), w hich in this case is
0.2S 55. T h is means that if incom e rises by one per cent. W T P for better
water q u a lity in the Ganga m ay be expected to rise by 0 .2 8 5 5 per cent.
.Although this is perhaps lo w in com parison to the com parable elas­
ticities
(in
the context o f im provem ents
in
freshw ater q u ality )
in
d eveloped countries, this is not unusual, especially for non-user benefits
valued in a d ev elo p in g country.
T h e v a ria b le A G E is n eg a tive ly correlated w ith incom e, and sig­
n ific a n tly so, con firm ing the result from
the earlier regression that
younger respondents tended to give h igher values o f W T P for water
q uality im p ro vem en ts in the Ganga.
R e p la c in g all the right-hand side variables by th e ir (sam ple) mean
values and setting the Q U A L IT Y index equal to 100 gives the estim ated
household W T P for best or bathing q u ality, w h ile selling the Q U A L I T Y
index equal to 4 8 .6 3 gives the estim ated household W T P for current
q uality (1 9 9 5 ), and setting it at 3 1 .6 4 gives the estimated household
W T P fo r past q u ality (1 9 8 5 ).
T h e estim ated household W T P for e a d i o f these w ater q u ality levels,
from using three d ifferent methods, is presented in the fo llo w in g section.
E S T I M A T E S O F M E A N W I L L IN G N E S S - T O - P A Y A N D A V E R A G E
V A L U A T I O N O F I N C R E A S E S IN R I V E R Q U A L I T Y
Table 5 .6 details the three household w illin g n es s-lo -p a y ( W T P ) es­
tim ates that result from using the sam ple m edian, the estim ated mean
from the econom etric model w ithout w ater quality, and estim ated m ean
108 / Cleaning-up the Ganges
from the econom etric model w ith water q u a jitjjjQ r different levels of-water quality.
T a b l e 5,6
M e a n W illingness-to-pay for A ll
Levels o f river water quality
Basis f o r household
Best
1995
W TP calculation
quality
quality
quality
quality
with G A P
with CAP
with GAP
wiihctit GAP
1. Sample median
500.00
200.00
100-00
2. Estimated mean
(model without quality)
533.02
217,79
91.64
3. Estimated mean
(mode! with quality)
557.94
192.81
101.48
1985
1995
97.51
The level o f non-user benefit o f achieving bathing quality (the ul­
timate G A P objective) to an urban literate household'^ ranges between
the sample median figure o f Rs 5 00 per annum and the value o f the es­
timated mean from the econom etric model with water quality included
as an explanatory variable, Rs 5 5 7 .9 4 per annum.
The value o f non-user benefits from the current level (1 9 9 5 ) o f water
■qualily ranges sim ilarly from Rs 192.81 to Rs 217.79 per household per
annum, w h ile that o f non-user benefits from the past quality (1 9 8 5 ) ran­
ges from Rs 91.64 lo Rs 101.48 per household per annum.
The econometric model w iih the qualily variable makes possible a
useful further calculation: the non-user benefits from the scenario which
would have existed currently (in 1995) w ith o ut GAP, w ith the Index o f
R iver W ater Q u ality (see A p pen d ix 5 .2 ) set at 30.62 (the value the Index
takes w ith B O D levels that sim ulations on the W ater Q uality M o d el in d i­
cate w ould obtain in 1995 i f Ihe Ganga Action Plan had not started).
Setting the Q U A L IT Y variable equal lo 30.62 in the estimated regression
equation yields the level o f annual non-user benefits each household
could expect to receive in the absence o f the Ganga A ction Plan, w hich is
the num ber in the boflom right-hand corner o f Table 5.6, i.e. Rs 97.51.
'°When reference is made to a household being ‘educated’ o r.‘literate’ , it is
simply to indicate that the head of the household or the respondent from the
household (above the age o f 21 years and rcspopsiblc enough to make financial
decisions for the household) is cither educated or literate.
Measuring Non-user Benefits from Cleaning-up the Ganges I 109
In addition to these household values, incremental values o f W T P can
also be generated. F o r instance, the difference between the W T P for 1995
Quality and 1985 Q uality gives the value o f benefits (per household per
annum) from the improvements in water quality carried out between
19S5 and 1995, S im ila rly , the difference between the W T P for B est or
Bathing Q uality and 1995 Q uality, gives the value o f potential benefits
from cleaning the riv e r up to uniform bathing quality throughout the
ri\'er. These incremental value calculations presented in Table 5.7 are
based on for the estimates o f household willingness-to-pay given in
Table 5.6.
T A 0 L E 5 .7
W illingness-to-pay for Improvements in R iv e r Water
Q uality b y 'A ll Non-users
(Rupees per household at 1995-6 prices per annum)
B a s is f o r h o iis e lw id \V T F c a ic u ia u o n
Ct\anges in water
qua lily levels
Estimated mean
Sample
median
M o d e l w ith o u t
M o d e l w ith
q m lU y
q u a lity
1. 1985
10
bathing quality
400.00
441.38
455.42
2. 1995
10
bathing quality
300.00
315.22
365.13
1 0 0 .0 0
126.15
91.34
3. 1985 to 1995 quality
4, Simulated to actual
(1995) quality
5. Simulated (1995) to
bathing quality
■
95.30
-
-
460,43
Table 5.7 shows that the value o f the benefits to an average urban
Indian literate and employed household o f im proving river water
quality from the 1985 level to bathing quality (the ultimate objective o f
the G A P ) ranges between R s 400 and R s 455.42 per annum.
The estimated benefit o f raising water quality from the current
(1995) level to bathing quality ranges from R s 300 to R s 365.13 per
household per annum, and that of increasing water quality in the Ganga
from 1985 lo the present (1995) ranges between R s 91,34 and R s
126.15. T h is last value represents one interpretation o f the benefit tg the
average literate and employed urban Indian household of having the
Ganga-Action Plan.
110 / Cleaning-up ihe Canges
A n oth er measure o f the estimated benefit o f the G A P is the d if­
ference between the benefits that wouid accrue to households in 1995
had the Q N ? no t been implemented (the ‘without G A P scenario’) and those
that have actually accrued in 1995 as a result o f ihe GAP. This calculation
is only possible when using the model w ith quality included as an ex­
planatory variable, and the figure is Rs 9 5 .3 0 per household per annum.
F in a lly , this estimation o f benefits gives another measure o f the total
benefit the G A P can be expected to have, once the objective o f uniform
bathing q u ality is achieved. This is the difference between the benefit
that w ould have accrued in 1995 in the absence o f the G A P and the total
benefit o f achieving bathing quality, which is the number in the bottomright hand corner o f Table 5.7, that is, Rs 4 60.43 per annum per
household.
From each o f these household W T P s, a population estimate has to be
computed in order lo generate total W T P for each level o f water quality
and for the increm ental benefits calculated. Thi.s is done in tlic fo llo w ­
ing section.
A G G R E G A T E W I L L IN G N E S S - T O - P A Y F O R W A T E R Q U A L I T Y L E V E L S
A N D IM P R O V E M E N T S
There are tw o stages in the extrapolation o f household willingness-topay estimates to the population; fir.st, calculating the size o f the target
population sampled; and second, m u ltip lyin g the mean willingness-topay by this population size. K eeping in mind that the population
sampled is the urban lileralc population in cities with a population o f
over 1 m illio n households, the step.s detailed in Table 5.8 yield the
desired total population size.
T a b l e 5 .8
The T o tal Population Sampled: Urban L itera te Households in India
N um ber o f urban households in India:
41 .4 1 8 m illio n
A verag e household size (all India urban population):
5.34
U rban lite ra c y rale (ali-Ind ia national average):
6 0 .0 0 %
N um ber o f Indian cities w ith populations above I m illio n :
23
Total po p ulation in these cities:
70.661 m illio n
Total n um b er o f households in these 23 cities:
(7 0 ,6 6 1 ,0 0 0 /5 .3 4 )
13.232 m illio n
T o tal n um b er o f literate households in these 23 cities:
(1 3 .2 3 2 ,3 9 7 x 0 .6 6 )
8.733 m illio n
Measuring Non-user Benefiis from Cteaiiing-up the Ganges / 111
Using Ihis total population figure of S.733 m illion households, the
household willingncss-to-pay (in terms o f rupees per household per
annum) can be aggregated into a population or total willingness-to-pay.
These figures, for each set of household willingncss-to-pay estimates,
generated above in Tables 5.6 and 5.7 are presented in Tables 5.9 and
5.10.
. ,
Table 5.9 presents the aggregated value o f benefits to urban literate
and employed households for different levels o f wafer quality, including
the simulated 1995 quality in the absence of the Ganga Action Plan.
This table shows that the value o f aggregate benefits to the urban
employed and literate population in India (for 23 cities with a popula­
tion greater than 1 m illion) from a Ganga lliat is cleaned up to bathing
quality ranges between R s 4366.69 m illion and R s 4872.694 million per
annum,
T
a b l e
5 .9
Aggregate Willingncss-to-pay for Ganges Water Quality Levels
(Rs million per annum)
Level of water quality
B a sis f o r h o u selio B I W l'P c a lc iila lio n
Esiiinaled mean
median
Model u'iihotn
utiaiiiy
Bathing quality
4366.7
4655-0
4872.7
Current quality (1995J
1746 7
1902.0
1683.9
S73.3
800.3
851.6
Past quality (19S5)
Simulated 1995 quality
without G A P
Model
with qnnlity .
886.2
The value o f aggregate benefits to this population from the current
quality (1995) of Ganga ranges from R s 16S3.9 m illion to Rs 1902 m il­
lion per annum, while that from the 1985 quality of Ganga (that is,
before the G A P ) is bctvveen Rs S00.3 m illion and Rs 873.3 m illion per
annum. An additional figure is available from (he model with quality
included as an explanatory variable, the aggregate value o f benefits
from the level o f water quality that would have existed in the Ganga in
the absence of the GAP. T his value is Rs 8S6.2 m illion per annum.
Table 5.10 shows the aggregated value of the benefits o f dianging
112 / Cleaning-lip the Ganges
the level o f water quality in the Ganga. I f the quality were improved to
bathing quality (the ultimate G A P objective), the incremental benefit
from the period o f the inception o f G A P would be between Rs 3493.4
m illion and Rs 4021.1 m illion per annum. This is one interpretation o f
the overall benefit from the G A P (Phases I and II) to the urban
employed and literate population in the 23 major cities (with a popula­
tion of over 1 m illion) in the country.
T a b l e 5 .1 0
Aggregate Willingness-to-pay for Changes in
Ganges Water Quality Levels
(Rupees m illion per annum)
B a s is f o r h o u se h o ld W T F c a lcu la tio n
C h a n g e s in w a ter
Sa m p le m edian
E stim a te d
q u a lity levels
m ean
M o d e i w ith ou t
M o d e l with
qu a lity
q u a lity
1985 lo bathing quality
3493.4
3854.7
4021,1
1995 to bathing quality
2620.0
27523,0
3188.8
873.3
1101.7
797.7
1985 to 1995 quality
Sim ulated to actual (1995) quality
-
-
832.3
Sim ulated (1 9 9 5 ) to bathing quality
-
-
3986.5
I f river water quality improved from the current (1995) quality to
bathing quality, the value o f additional non-user benefits generated ran­
ges from Rs 2620 million to Rs 3188.8 m illion per annum.
The value o f additional non-user benefits to urban literate and
employed households of river water quality improvements from 1985 to
1995, the period o f interest in the present evaluation study, ranges from
Rs 797.7 m illion to Rs 1101.7 m illion per annum.
Further, the benefits o f having the G A P today could be interpreted
as the value o f the aggregate incremental benefits, between the value
given for actual current (1995) quality and that o f simulated current
quality (1995) (that is the value had the G A P not taken place), which is
Rs 832.3 m illion per annum.
■'
Note that there are two interpretations o f the benefit o f having G A P
(Phase I) today: (1) the incicmcntal benefits from 1985 to 1995; and (2)
M easu ring N o iv u s e r Benefits from Cleaning-up the G anges
the d iffe re n c e b etw e en the b e n e fits fro m the
/
113
c u rre n t ( 1 9 9 5 ) q u a lity
(w ith the G A P ) and those fro m the s im u la te d c u rre n t ( 1 9 9 5 ) q u a lity
(w ith o u t the G A P ) . U s in g the results fro m the e c o n o m e tric m o d e l w ith
q u a lity in c lu d e d as an e x p la n a to ry v a ria b le , the v a lu e fo r the firs t is Rs
7 9 7 .7 m illio n and that o f the second is R s S 3 2.3 m illio n . T h e la tte r is
thus 4 .3 2 p e r cen t h ig h e r than the v a lu e based on the d iffe re n c e b e tw e e n
actual 1 9 8 5
and
1995
w a te r q u alities , re fle c tin g
the fa c t that
1995
q u a lity w ith o u t the G A P is w o rs e than actual 1 9 8 5 q u a lity .
L astly, the b en e fits o f h a v in g the G A P (Phases I and I I ) m ay be in ­
terpreted as the v a lu e o f a g g re g ate in c ie m e n ta i b en e fits fro m the w a te r
q u a lity s im u la te d fo r 1 99 5 and that from u n ifo rm b a th in g q u a lity in the
river, the fig u re in the b o tto m rig h t-h a n d c o m e r o f the T a b le 5 .1 0 , Rs
39S 6.5 m illio n per a n n u m .
N o te that again there are tw o w ays o f in te rp re tin g the b e n e fit o f
having the G A P (Phases I and II) : ( I ) a.s the d iffe re n c e b e tw e e n the past
(1 9 8 5 ) v a lu e o f b en e fits and
those from
a c h ie v in g
u n ifo rm
b a th in g
qu ality, that is R s 4 0 2 1 .1 0 m illio n p er an n u m and ( 2 ) as the d iffe re n c e
betw een the s im u la te d ( 1 9 9 5 ) value o f b en efits and the benefits fro m
having u n ifo rm b ath in g q u a lity w a le r in the riv e r, w h ic h is the n u m b e r
in the b o tto m rig h t-h a n d c o rn e r o f the T a b le 5 .1 0 , that is Rs 3 9 8 6 .5 m il­
lion per a n n u m . T h e fo rm e r is less than I per cent h ig h e r than the latter.
C O N C L U S IO N
This .study p ro vid e s f u illie r support to the v ie w
\a iu a tio n
M e th o d
can
be
used
successfu lly
that the C o n tin g e n t
to
m easure
n o n -u s er
benefits fro m e n v iro n m e n ta l resources in d e v e lo p in g c o u n trie s. T h e im ­
p le m en tatio n
o f c a re fu lly
designed q u estion n aires
to survey sam p le
Households in e le v e n m a jo r cities in In d ia e v o k e d u n e x p e c te d ly good
responses a b o u t the h o u se h o ld s ’ v a lu a tio n o f n o n -u s er b en e fits fo r an
im p ortan t w a te r resource in the cou n try. A p art o f this response m ay, no
doubt, be because the s a m p le consisted o f households fro m the lite ra te
urban p o p u la tio n in the c o u n try , w ith a c a p a c ity to a p p re c ia te e n v iro n ­
m ental c o n c ern s in the c o u n try and, in p a rtic u la r, the con cern a b o u t the
control o f p o llu tio n in a riv e r o f m a jo r e c o n o m ic and re lig io u s sig ­
n ifica n ce lik e the G a n g a . A p a rt fro m p ro v id in g data fo r e s tim a tin g the
household v a lu a tio n o f n o n -u s e r ben efits, the s u rvey can also b e said to
have p e rfo rm e d the im p o rta n t social fu n c tio n o f in c re a s in g e n v iro n m e n ­
tal aw areness o f the urban p o p u latio n in In d ia .
T h e surveyed urb an households re ve aled consistent p referen ces fo r
114
/
C iean in g-u p the G a n g es
the q u a lity o f G a n g a in the three scenarios p re se n te d — ( i ) 19S 5 q u a lity
(that IS, b e fo re the G A P ) , (2 ) c u rre n t q u a lity , ( 1 9 9 5 ), and (3 ) b a liiin g
q u a lity (th e u ltim a te o b je c tiv e o f the G A P )— w ith the hou seho ld v a lu a ­
tions ris in g w ith the increased q u a lity o f the riv e r. D a ta also sho w ed
lh a t th e ir p re fe ren c es w e re also consistent in that v alu a tio n s increased
w ith in c o m e , s ize, and e n v iro n m e n ta l aw areness o f the hou seho ld.
The
e s tim a tio n
results
fro m
the e c o n o m e tric
m odel
w ith
w a te r
q u a lity in c lu d e d as an e x p la n a to ry v a ria b le had a good m easure o f f it
to the d ata and all the v a ria b le s o f the c o rrect sign (d e n o tin g consistent
p re fe re n c e s ) and w e re h ig h ly s ta tis tic a lly s ig n ific a n t.
The
m a in results fro m
this m o d el sho w
lh at fo r the 8 .7 m illio n
h ouseholds fro m the urban lite ra te p o p u latio n in 2 3 m a jo r cities (w ith a
p o p u la tio n o f m o re than 1 m illio n ) in In d ia ,
the a verag e a n n u al w il l-
in g n e s s rto -p a y ( W T P ) fo r b a th in g q u a lity w a te r in the G a n g a is R s
5 5 7 .9 4 p e r h o u sehold per a n n u m , w h ic h y ie ld s an agg reg ate fig u re o f
Rs 4 8 7 2 .7 m illio n p e r a n n u m .
T h e a v e ra g e ann u al W T P for cu rren t q u a lity ( 1 9 9 5 ) in the G a n g a is
Rs 1 9 2 .8 1
p er h o u seh o ld per a n n u m , w h ic h aggregates to Rs 1 6 8 3 .9
m illio n p er a n n u m .
T h e v a lu e o f n o n -u s er b en e fits fo r past q u a lity , ( 1 9 8 5 ) that is, the
q u a lity that e xis te d
b efo re the G A P was in itia te d , is Rs
a n n u m p e r ho u seho ld, and totals Rs 8 5 1 .6
1 0 1 .4 8 p er
m illio n per a nn u m .
T h e e c o n o m e tric m o d el w ith w a te r q u a lity m a ke s a fu rth e r c a lc u la ­
tio n p o ssib le. U s in g an In d e x o f R iv e r W a te r Q u a lity d e v e lo p e d o n the
basis o f d ata fro m the N a tio n a l R iv e rs C o n s e rv a tio n D ire c to ra te , M i n ­
istry o f E n v iro n m e n t and F o rests, and s im u la tio n s o n the W a te r Q u a lity
M o d e l d o n e by the In d u s tria l T o x ic o lo g y R e s e a rc h C e n tre , L u c k n o w ,
the n o n -u s e r b en efits o f the w a te r q u a lity that w o u ld h av e e xis te d in
1 9 9 5 in (h e a b s e n c e o f the G A P can be w o rk e d o ut. T h is fig u re is R s
9 7 .5 1 p e r h ousehold per a n n u m , on averag e, and R s 8 8 6 .2 m illio n p er
a n n u m in total.
U s in g these m ean W T P values for n o n -u s er b en e fits , the b e n e fit o f
h a v in g th e G A P today can be estim ated in tw o w a ys : (1 ) the in c re m e n ­
tal b e n e fits fro m
J9S5 to
1 9 9 5 ; and (2 ) the d iffe re n c e b e tw e e n the
benefiLs fro m the actual c u rre n t q u a lity ( 1 9 9 5 ) and those fro m the s im u ­
lated c u rre n t q u a lity (1 9 9 5 , w ith o u t the G A P ) . T h e fo r m e r is R s 7 9 7 .7
m illio n p er an n u m and the la tte r is Rs 8 3 2 .3 m illio n p er a n n u m , b ein g
4 .3 2
p e r cent h ig h e r tlian the fo rm er, re fle c tin g the fa c t that w a te r
q u a lity in 1 9 9 5 w ith o u t the G A P w o u ld be w o rs e than the 1 98 5 q u a lity
w ith G A P .
Measuring Non-user Benefits front Cleaniiig-tip the Canges / 115
Similarly the benefit of having the GAP (Phases I and II) can be in­
terpreted in two ways: (1) as Ihe difference between the past (I9S5)
value of benefits and those from achieving uniform bathing quality; and
(2) as the difference between the simulated value (1995) of benefits and
the benefits from having uniform bathing quality water in the river. The
former of these amounts lo Rs 4021.1 million per annum, while the
latter is about 1 per cent lower at Rs 3986.5 million ner annum.
6
M easunng User Benefits from
Cleaning-up the Ganges
INTRODUCTION
T h is c h a p te r e va lu ates the b e n e fits o f the G A P to those w h o n o rm a lly
reside n e a r th e riv e r, and w h o use the riv e r d ire c tly , and also to those
w h o m a y v is it the r iv e r fo r p ilg rim a g e s or tou rism . Such b en e fits are
o th e rw is e c a lle d 'u s e r’ or ‘d ire c t-u s c r’ b en efits.
W e b e g in by discussing b r ie fly the typ e o f user benefits b ein g sur­
v e y e d b e fo re d e ta ilin g the q u e s tio n n a ire fo rm a t used fo r this s u rve y and
then p re s e n tin g the results o f the analysis. T h ese results are com p a re d
to e stim a te s o f user v a lu e fro m r iv e r w a te r q u a lity im p ro v em e n ts fro m
o th e r s tud ies in d e v e lo p in g c o u n trie s , b efo re the m a in p o in ts o f the
analysis o f user b en e fits are d ra w n together.
USER BENEFITS OF GAP AND THEIR iMEASUREMENT
B e n e fits fro m the G a n g a A c tio n P la n ( G A P ) that accru e to p eo p le w h o
Slay n e a r the riv e r o r v is it the riv e r fo r p ilg rim a g e s , o r fo r to u ris m , are
b ro a d ly te rm e d user b en e fits . T h e s e can in clu d e b en efits fro m h a v in g
c le a n e r riv e r w a te r fo r irrig a tio n , fo r d irect d rin k in g , w ash in g and b a th ­
in g , and fo r in d u stria l use, as w e ll as b en efits fro m h a v in g a b etter riv e r
e n v iro n m e n t (w ith g re a te r b io d iv e rs ity ) fo r re creatio n and aesth etic e n ­
jo y m e n t. T h e s e d ire c t user b e n e fits can be fu rth e r d iv id e d in to user
b en e fits a c c ru in g to the urb an and rural p o p u la tio n , since the ty p e o f
uses the r iv e r is put to can v a ry across ru ral and u rb an areas. T h e m a jo r
d is tin c tio n , o f course, w ill be that ru ral areas use w a te r fo r irrig a tio n
e ith e r d ir e c tly fro m the riv e r, o r through w e lls w h ic h are rech arg ed by
the riv e r. A ls o , to u ris m and p ilg rim a g e s lend to be c o n c e n tra te d in
u rb an areas.
T h is
stu d y, h o w e v e r, c o n c en trate d on m easu rin g o n ly d ire c t-u s e r
b e n e fits to urban p o p u latio n s fro m the G A P . It d id not c o v e r n o n -u s er
.
Measuring User Benefits from Cleaning-up the Ganges I 117
benefits that m ay accrue to direct users, for tw o reasons. F irs t, non-user
values were alrea d y being picked up by the su rv e y o f non-user benefits
(reported in the previous chapter). Second, there is a caution in the
literature on benefit estim ation against U ying to p ic k up user and non­
user values to g e th e r (as total econom ic v alu e ) and then trying to
separate them into user and non-user com p onents.’ F in a lly , for reasons
mentioned e a rlie r, the su rvey concentrated on literate and em ployed
populations in cities along the G anges, though a part o f the sam ple
covered p ilg rim s and tourists to the m ajor relig io u s sites. T h u s, the en­
vironm ental am enity being valued and Ihe target population are: direct
user benefits o f the G A P to the uiban literate, and the em ployed popula­
tion livin g along the riv e r (as w e ll as tourists and pilgrim s at the m ajor
religious sites) resp ectively. T h e method o f m easurem ent is contingent
valuation.
C O N T IN G E N T V A L U A T IO N O F U S E R B E N E F IT S O F
TH E GAP
S A L IE N T F E A T U R E S O F T H E C O N T IN G E N T V A LU A T IO N S U R V E Y
A s in the case o f the contingent valuation su rv e y o f non-user benefits,
the survey o f user benefits had to address a p o s t h o c evaluation o f
benefits fro m the G A P , o f w ater quality im provem ents from 1985 (the
year o f incep tio n o f the G A P ) lo 1995. T h e approach taken was sim ila r
to that adopted in the non-user survey (reported in Chapter 5 ab o ve),
nam ely, to a sk respondents fo r an e xp lic it valuation o f three different
levels o f w ater q u ality: ( I ) as it was in 1985, before the G A P ; (2 ) as it
was in 1995, ten years after the G A P was initiated ; and (3 ) as it w as
projected to be after the com pletion o f the G A P (Phases I and I I ) . W ater
quality m aps (See Fig u re s 1.2, 1.3, and 1.4) w ere used once again and
respondents w ere told to assum e, in each case, that w ater q u ality w as
as shown in the m ap and that no further changes w ere to be expected.
T h is allo w e d , as in the previous case, for the calcu lation o f increm ental
differences in benefits received.
T h e ch o ice o f m easure o f benefit w as, once again, consum ers’ com-
’ For instance, Mitchell and Carson (1989) write: ‘ While webeiieve C V surveys
are capable uf measuring benefits that include a non-use dimension, we are less
optimistic about ihcir abilily to obtain meaningful eslimalcs of separate component
values’ (p. 67).
118 / Cleaning-up the Ganges
pensating surplus, to be captured by using a w illingness-to-pay form at.
T h e elicitatio n form at used was also an open-ended bidding gam e,
using a varian t o f the ‘Paym ent C a rd ’ , where respondents were asked
two fo llo w -u p questions to their in itia l (non-zero) bid (fo r further
details see previous chapter).
T H E Q U E S T IO N N A IR E
T he fin al questionnaire used (w h ic h is sim ilar to the questionnaire used
for non-user benefit survey) had the fo llo w in g features:
In fo rm a tio n a b o u t C a p
A lthough those livin g near the riv er could be assumed to have a greater
know ledge and fam iliarity w ith the G A P , pre-testing showed that there
were significant gaps in '.he detailed know ledge o f the size o f the p o l­
lution p roblem and the various steps being taken by the G A P to tackle
the p roblem along the entire stretch o f the river.
The first section o f the questionnaire briefly sum m arized the basic
causes o f pollution in the river, p o in ting out that domestic sewage from
large cities was the largest cause o f pollution (and not industrial p o llu ­
tion, as is com m only understood), and then gave a short account o f the
activities o f the GAP, ranging from setting up sewage treatm ent plants
(to com bat sewage-based p o llu tio n ) lo constructing electric crem atoria
(to control the immersion o f un b um t or partly-burnt corpses in the
river). T h e three maps o f w ater q u a lity maps were also shown at this
stage.
Th ere w ere short questions about w hether the respondent had visited
any other sites along the riv e r in tlie last ten years, about the ways in
which the respondent used or expected to use the river, and w hether or
not the respondent felt it was w o rth w h ile to improve the water quality
for battling (and then for d rin k in g ), irrespective o f the cost.
P re fe re n c e E lic ita tio n
This section carried questions aim ed at eliciting consumer preferences
for action to clean the river. T h ey w ere designed to make the respondent
think about the responsibility o f action to clean the river. T h e conclud­
ing question asked respondents w hat role they perceived fo r themselves
in the fig h t against pollution, irrespective o f the nature o f governm ent
.
Measun'iig User Benefits from Cleaning-up the Canges
/
119
action to that end. T h is led on to the value e lic ita tio n questions in the
n ext section.
Value Elicitation
T h e m eth o d o lo g y was s im ila r to that fo llo w e d in the non-user survey,
and so, o n ly the o u tlin e o f each com ponent o f this section are given
below .
D e t a i l i n g THE H y p o t h e t i c a l S c e n a r i o :
R espondents were in itia lly
g iven e xam p les o f p rivate goods (w illin g n e s s to pay the cost o f a pen
in return fo r the benefits o f its use) to illustrate the lin k between w illingness-to-pay and benefits re ceived . Respondents w ere then asked to
consider riv e r w a te r q u a lity as a sort o f pub lic good, and given a rough
idea o f the benefits accruing fro m various other go vern m en t-provid ed
pub lic goods, lik e educatio n al fa c ilitie s , e le c tric ity and power, health
fac ilitie s and transport, as the am ount the governm ent spent per year per
household to p ro v id e these various public goods, as shown on a card.
S p ecify in g t h e B u d g e t C o n s t r a i n t :
A p a rt fro m a rem in d er to k e e p
th e ir in c o m e and exp end itu re constraints in m ind, respondents w ere also
told to thin k o f user benefits fro m a clean-up o f the riv er in the same
m anner as they n o rm a lly ‘v a lu e d ’ benefits from healih; w h ile one could
consider the benefits o f good health as ‘p riceless’ or ‘ in fin ite ’ , in p rac­
tice, one c o u ld not spend m o re than o ne’s in com e on health fac ilitie s.
A n d even then, one spent o n ly a fractio n o f o n e ’s incom e on them . T h e
intention, as in the case o f the survey o f non-user benefits, was lo try
and avoid im p o s sib ly high estim ates (hat m ay be expected in the c o n ­
text o f a riv e r w ith considerable religious and sym b o lic im portance.
In a d d itio n , ail respondents w lio answered ‘N o ’ to the R espondent
E v a lu a tio n Q uestion: ‘D o you feel you may actually be required to pay
for w a te r q u a lity im p rovem en ts in the G anges?’ , w ere dropped from the
sam ple, tlic reason being that those who did not feel that their answers
had to be constrained by considerations o f actual paym ent m ay have
d elib e ra te ly overstated their w illin g n es s-to -p ay .
T h e C h o i c e o f E l i c i t a t i o n F o r m a t : A s in the c a se o f the su rvey o f
n o n -u s e r b en e fits, a v ariant o f the o p en -en d ed b id d in g g a m e form at
b ac ked by a versio n o f a ‘P a y m e n t C a r d ’ in a m u ltip le bid form at w a s
used, with an initial bid, a se c o n d bid, and a final bid. T h e first bid w as
120 / Zleaning-up the Ganges
open-rnoed, but based on the Payment Card, followed by a second,
take-:>€7-leave-it question based on the initial bid, and a final question
askec ; c : the m axim um they would pay. The response to this last ques­
tion - l i taken to be the W T P value. T h is procedure was followed for
the f ; :i : scenario, that is, best or bathing quality, but only one question,
askir.r ror the maximum W T P , was used for the second and third
scenarios (1995 and 1985 levels o f water quality).
PosihC- THE V a l u a t i o n Q u e s t i o n :
Value elicitation questions were
poseri once again, as exp licit valuation problems. Respondents were
showr each m ap o f water q u ality and (old e x p lic itly to assume that the
water q u a lity shown actually obtained at the present, a n d th a t they
s h o u -i e x p e c t no f u r t h e r c h a n g e s in w a te r q u a lity . They were then
askez :c evaluate the benefits they w ould receive as direct users i f water
m thr r.-.e r s ta y e d at that particular quality level.
T : _ i . respondents were paying (o enjoy the benefits they would
rece: .e ;n the hypothetical situation that the river water quality was at
that ra rricu la r level. T h is also helped avoid any tendency on the part o f
the rrspondents to value worse water quality higher, since they im ­
agine: ih ey would have lo pay more to clean up a dirtier river.
T h e Z h d i c e o f t h e P a y m e n t V e h i c l e : After considering several al*
t e rn i::v £ 5 at the prc-icsting stage, paym ent to a reputable charitable or­
g an.:u;:on w as chosen as the p ay m en t vehicle.
S o c .M fs o /io tn ic
details
'
T h i; section o f the questionnaire collected information on socioecori;cr,!C variables to be used in the regression estimation o f the valua­
tion Trir.ction. Apart from the name of the respondent and the address,
in fc— uiion was coliecled on age, educational level (Table 6,1), occupa­
tion. s i-e o f the household (both above and below 18 years), and gross
a n n _:i household incom? from all sources. The last was posed alterna­
tive./ in the form o f bands of possible incomes, which the respondent
c o u j c choose. G iven the proclivity o f underestimating income in the
couruw, the subsequent analysis took the upper lim it o f the income
clas; chosen, as representative o f the income o f the respondent.
E-ulU on the gender of the head of the household showed that around
12 re r cent o f those surveyed were female-headed households. No attem.ct '.vas made to analyse data for the sub-sample o f female-headed
houMf.oids.
,
M e a s u r i n g U s e r B e n e f it s f r o m C le a n i n g - u p th e C a n g e s / 121
T a b l e 6,1
Frequency Distribution o f User Samples by Education Levels
E d u c a tio n Level-
U s e r S a m p le (% )
Up to class X I I
2 1 .6
Graduate ( B .A .)
33.7
Postgraduate (M .A .)
28.2
Professional qualification
13.1
Other qualification
3.3
R e s p o n d e n t ’s E v a l u a t i o n
Several questions were asked in this section as a follow-up to the ques­
tions posed in the previous sections. In particular, they asked for the
respondent’s evaluation of the clarity o f the enumerator’s presentation
of the questionnaire, the extent to which the respondent believed the
answers provided would influence policy and affect clean-up opera­
tions, and whether or not the respondent believed actual payments
would be asked for. These helped to screen out questionnaires whose
responses m ight be biased for a lack o f clarity o f exposition by the
enumerator.
E n u m e r a t o r ’s E v a l u a t i o n a n d D e c l a r a t i o n
Two questions were put to the enumerators at the end o f the interview,
to ascertain the attitude and capability of the respondent to answer the
elicitation questions. They asked the enumerators to describe the level
o f perceived effort by the respondents lo focus on the hypothetical
scenario and to understand the context and purpose o f the elicitation
questions. Questionnaires where enumerators felt respondents either did
not pay sufficient attention lo the valuation question.s or did not under­
stand [he questions were subsequently elim inated from the sample.
Further, enumerators were asked to sign a declaration stating that the
interview had been conducted honestly, and in accordance with the in­
structions they had received during their training. The basic purpose o f
these questions was lo instil a sense o f responsibility in the enumerators
in exerting their utmost lo elicit accurate responses.
122 /. C le a n in g -u p the G a n g e s
T H E S A M P L IN G
T h e sam ple was lim ilcd to residents, tourists, and pilgrim s (at the bath­
ing ghats) in the major cities along the river. Three cities were sampled;
A llah ab ad , Varanasi, and C alcutta, w ith a total target sample size o f 3 00
per city, g iv in g a total target sample o f 900. The final sample size was
.
845, the rest being protest bids, incom pletely fille d -in questionnaires, or
questionnaires
where
respondents
had
either
not
understood
the
hypothetical scenario or d id not expect to actually pay for im p ro v e ­
ments in w ater quality according to their stated w illingness-to-pay.
W ith in
each city, the sam pling scheme was designed
(o cover
residential areas w ithin h a lf a kilo m etre on either side o f the riv e r and
all m ajo r pilgrim age centres (bathin g ghats), with control for geographi­
cal spread and income categories. A g a in , at least as far as the residential
sample was concerned, o n ly the literate and the employed were chosen
from am ong the urban population liv in g within a range o f h a lf a
kilom etre from the river. R ev ie w ers o f the draft report have questioned
these lim its , and have argued lhat user benefits could be spread w id er
than 0 .5 kilom eters on each side o f the river. Som e o f these benefits are
picked up by the agricultural and health benefits but it excludes visitors
to the sites from further a field . W e acknowledge that this assumption
has pro b ab ly resulted in som e underestimation o f the benefits, which,
u nfortunately cannot be corrected at this stage.
The choice o f enumerators was again restricted to college and
U n ive rs ity students, who w ere each paid Rs 25 per fully fille d -in ques­
tionnaire, plus Rs 10 for local travel costs. The fo llo w in g section
presents the analysis o f the data and the results.
E S T IM A T IO N R E S U L T S
There are three sets o f results. First, the calculation o f the mean w illingness-io-pay (W T P ). Second, the extrapolation o f these average W T P
estimates to the populafion. T h ird , the calculation o f increm ental W T P
for d ifferen t sets o f changes in w ater quality.
M E A N W IL LIN G N E S S -T O -P A Y
D ata fro m the city samples (A llah a b ad , Varanasi, and C alcutta) w ere
pooled to get an ‘A ll users sam p le’ . This data was screened to elim in ate
incom plete questionnaires
[in clu d in g protest (zero) bids] and those
which d id not reflect the budget constraint. I t was also screened to
M easuring User B enefits fro m Cleaning-up the Ganges / 123
elim inale questionnaires where
respondents were assessed by
the
enumerators as either not understanding t/ie valuation question or not
giving it sufficient consideration. This reduced the final sample size by
about 30 per cent, from 845 to 576 usable observations. As explained
in the case o f the contingent valuation survey of non-user benefits, this
reduction is not unusually large and includes data screening to ensure
that opiy those households which fully understood the hypothetical
scenario and expected to pay for water quality improvements were in­
cluded in the sample.
Average values for the benefits from three different levels o f water
quality (Best or Bathing Quality, 1995 Quality and 1985 Q uality) are
calculated in four different ways; firsl by taking the sample mean;
second, by using the sample median; third, by estimating a regression
equation with W T P for each level o f water qualily regressed on a vector
of socio-economic variables and dum m y variable, and using the average
values o f the regressors to generate estimates o f the dependent vari­
ables; and fourth, by estimating a regression equation with W T P for all
levels o f water quality regressed on an index o f water quality, a vector
o f socio-economic
variables and dummy variables, and using the
average values o f the regressors and the actual value o f the water
quality index to generate estimates o f the dependent variable. There are
thus four separate estimates o f mean W T P for each of the three water
quality levels, namely
.
B E S T M A X for Best or Bathing Quality,
C U R R M A X for Current or 1995 Water Quality, and
P A S T M A X for Past or 1985 Water Quality.
In addition to the sample mean, the sample median is used to provide
a measure o f central tendency in the sample, when the sample is
believed to be highly skewed since the median is less influenced by out­
liers than the arithmetic mean.
E C O N O M E T R IC M O D E L W IT H O U T W A T E R Q U A L I T Y
In the regression equation estimated for each level of water quality, the
dependent variable is the W T P elicited from respondents for that par­
ticular level o f water quality. The vector o f socio-economic variables on
which these dependent variables were then regressed are income, age,
education level, and household size, while dummies were added for
specific responses given in the questionnaire and also for cities where
124 / Cleaning-up the Ganges
.
the respondents stayed (described it) detail below). Three functional
forms were tried for each equation: the Cobb-Douglas form (in
logarithm ic-linear form), a modified Cobb-Douglas form (where in ­
come and age were entered in squared form ), and the Translog function­
al form. T h e final equation used in the calculation of the mean value
I was chosen on the basis of the highest Adjusted R G n d F-staiislics. The
' full specification of each equation in general form and in CobbDouglas form is given below.
G e n e ra l F o rm
W T P = /(C O N S T A N T , IN C O M E , A G E , S IZ E , E D U , V IS IT ,
B _ S T A N D , D _ S T A N D , C I T Y l . C IT Y 2 , C IT Y 3 ),
(6 .1)
where W T P is B E S T M A X for best or bathing water quality;
C U R R M A X for current or 1995 quality (with G A P ); and
P A S T M A X for past or 1985 quality.
C o b b -D o u g la s Lo g a rith m ic L in e a r F o rm
B L O G (or C L O G or P L O G ) = ct + a , IL O G + U a A L O G + as S L O G
+ Qe E L O G + Pi V IS IT + P j B _ S T A N D
+ P 3 D ^ STA N D +
+
62
C IT Y 2 +
63
61
C IT IY
C IT Y 3 + e.
(6.2)
where
B L O G (or Lo g B E S T M A X ) = Log (W T P for best quality);
C L O G (or Lo g C U R R M A X ) = Log (W T P for 1995 qiiaiity);
P L O G (or Lo g P A S T M A X )
= Lo g (W T P for 1985 quality);
IL O G (or Lo g IN C O M E )
= Lo g (per capita annual household
income from all sources);
A L O G (or Lo g A G E )
= Lo g (age of the respondent);
S L O G (or Lo g S IZ E )
= Lo g (size o f the household; with
members below the age of 18 years;
converted to adult equivalent units);
Measuring User Benefits from Cleaning-up the Ganges i 125
E L O G (or Lo g E D U )
= Lo g (education level o f the respond­
ent, in y e a rs)F
visrr
= Dum m y variable: Whether respond­
ents had visited die Ganga in the past
10 years; Y E S = 1; N O = 0;
'
B _STA N D
= Dum m y variable: Whether respond­
ents felt bringing water quality up to .
bathing standards was w orthwhile,
irrespective o f cost; Y E S = ] ; N O = 0;
D STAN D
= Dum m y variable; W hether respond­
ents felt bringing water quality up to
drinking standards was w orthwhile,
irrespective o f cost; Y E S = 1; N O = 0;
C IT Y l
= Dum m y variables: Whether the res­
pondent resided in the city of
Allahabad: Yes = 1; No = 0;
C IT Y 2
= D um m y variabies: Whether the res­
pondent resided in the city o f
Varanasi; Yes = 1; No = 0;
C IT Y 3
= Dum m y variables: W hether the res­
pondent resided in the city o f
Calcutta: Yes = 1; No = 0.
In each case the regressions were analysed using O rdinary Least
Squares (O L S ) with corrections made for heterosccdasticity when it
was detected (using a B reuseh-Pagan Clii-squared Test).
Th e results o f each equation (in Translog form ) a:e presented in
Tables 6.2 to 6.4, w hile Table 6 . 6 gives the mean W T P estimated from
each equation.
■
The best results in each o f these cases were from the Translog
specification o f the W T P functions.^
T o r the Translog functional form, the following additional variables were
used:
IL O G l (ILO G X lL 0 G )/2
ILO O A = iLO G X A LO G
IL O G E = ILO G X E LO G etc.
,
T e e footnote 9 in Chapter 5 for a discussion of the use of the Translog
specification in ihe W TP function and of the significance of the adjusted R'squared and the F-ratio in interpreting ilie ‘ goodness of fit’ of a regression equa­
tion.
126 / Cleaning-up the Ganges
There are several points o f interest in the estimates o f each o f the
three W T P functions. F irst, the regression equations have low A djusted
/(•square (o r R^) values. T h is usually indicates that the estimated equa­
tion is not a good tit to the data. H o w ever, it must be borne in m in d that
the reported estim ation results are for cross-section data, which do not
usually g ive as high
values as tim e-series data. S till, the generally
acceptable range being 2 0 per cent and above, these regressions do not
represent a p articu larly good fit to the data.
Second, very fe w o f the variables estimated are statistically sig­
nificant (indicated by the low values o f the relevant t-statistic, and by
the absence o f the asterisks that denote significance at either the 1 per
cent, the 5 per cent, or the 10 per cent error levels), although the incom e
variable is statistically significant in tw o regressions, and has the correct
(positive) sign in al] cases.
T h ird , the d u m m y variables show that the v ie w that d rin kin g quality
water is a w o rth w h ile objective irrespective o f cost had a statistically
significant im pact on subsequent W T P offers. In terms o f the city
dum m y
variables, the results show
that respondents from
C ity 2,
Varanasi, tend to g ive lo w e r estimates o f W T P than from the other two
cities.
R ep lacin g the regressors (right-hand side variables) w ith their mean
values and exponentiating the right-hand side o f the regression equa­
tions w ill yield the mean values o f the left-hand side dependent vari­
ables
that are o f interest,
namely, B E S T M A X , C U R R M A X ,
and
P A S T M A X . T h e results are given in Table 6.6, Th ere is another w ay o f
deriving household W T P , using a regression equation w ith water quality
included as an explanatory variable. This is described in the next
section.
E C O N O M E T R I C M O D E L W IT H W A T E R Q U A L I T Y
Tw o new variables are created in this m odel. First, a variable called
Q U A L IT Y is created as an index o f river w ater quality. This index is
calculated using the statistics on B O D (B io lo g ical O xygen D em a n d )
measured at d iffe re n t points along the Ganga in the years 1987 and
1996 (the tw o years closest to the years chosen, for w hich com plete
data was available). T h is weighted average was suitably calibrated to
increase w ith a decrease in B O D , or an increase in riv e r w ater q u ality
(these calculations are reported in detail in A ppendix 5 .2).
.
M e a s u r in g U s e r B e n e fits fr o m
C le a n in g - u p th e G a n g e s I 127
T a b l e 6.2
Estim atio n R e su lts for W illingncs,s-to-pay for B e st o r B ath ing Q u a lity
D ependent v a ria b le = B L O G
F[20, 555]
VariC^ble
Constant
= 15.3S059
= 5.043S96
Observations
= 576
Adjusted R^
= 12.33125
Econometric package = L IM D E P 6.0
C oefficient
t-ratio
P ro b |t > A'
-22.31000
-0,896
0-37004
M ean o f X
ILO G ,
4.70210*
2.575
0 .0 10 0 2
9.9032
ALO G
0.97899
0.169
0.S6551
3.7842
SLO G
-0.42064
-0,138
0.89029
1.4626
E LO G
D.3S55I
0.027
0.97812
2.7293
ILO G I
-0-3J633t
-2.459
0.01393
49.5690
ILO G A
0.03340
0,127
0.89S93
37.5040
ILO G S
-0.11625
-0.675
0.49957
14,1440
-0.45825
-0.809
0.41867
27.1010
0.4896S
0.429
0.66760
7.1956
0.16769
0.423
0.67246
5.5356
-0.879
0.37927
10.3260
IL O G E
ALO G A
ALO G S
ALO G E
-1.23000
SLO G S
0.62075+
1.785
0.07432
1.2235
SLO G E
0.16299
0.191
0.84870
3.9722
ELO G E
3.49060
0.658
0.51074
3.7360
V IS IT
0,02174
0,163
0.87047
0.66B4
B_S3'AN D
0.13377
0.836
0.40326
0.93056
D _S TA N D
0,21604t
2.119
0.03411
0,55729
C lT Y l
0.07488-'
■0.420
0.67432
-0.23264
C1TY2
-0.41026*
-3.444
0.00050
0.29167
C IT Y 3
0.09044
0.621
0.53471
0.18403
R esults c o rre c te d for lie te ro sc c d a stic ily : D rc u sd i-P a g a n c lii-sq u a re d (D F ) = 73.3461 (20).
Note:
* d e n o te s s ig n iric a n c e a l ihe I p er c e n t e rro r level,
t d c iio ic s s ig n ific a n c e a t the 5 per c e n t e rro r level.
4 d e n o te s s ig n ific a n c e a t the 10 per c en t e rro r level.
■
128 / Cleaning-up the Ganges
T able 6.3
E stim atio n R e s u lts for W illin gn ess-to -p ay for C u rre n t or 1995 Q u a lity
Dependent variable = C L O G
= 16.50264
F[20. 555)
= 5.484586
Observations
= 576
Adjusted
= 13.49373
Econometric package = L IM D E P 6.0
Variable
C oefficien t
t-ratio
P ro b |r| >jt
Constant
-27.51600
-1.019
0.30815
M ean o f X
ILO G
5.62660*
2,739
0.00616
9.9032
A LO G
6.43420
1.034
0.30114
3.7842
S LO G
-0,13860
-0.045
0.96413
1.4626
E LO G
-7.55820
-0.525
0.59946
2.7293
ILO G I
-0-441 IS *
-3.419
0.00063
49.5690
ILO G A
0.02475
0.094
0,92527
37.5040
ILO G S
-0.27343*
-1.721
0.08526
14.1440
IL O G E
-0.24523
-0.396
0.69209
27.1010
A LO G A
-0.84481
-0.725
0.46851
7.1956
A LO G S
0,14564
0.372
0.71024
5.5356
ALO G E
-1.32190
-0.870
0.38416
10.3260
S LO G S
0.53761
1.610
0.10737
1.2235
SLO G E
0.68499
0.808
0.41903
3.9722
ELO G E
5.55810
0,987
0.32384
3.7360
V IS IT
-0.10349
-0.744
0.45673
0.6684
B^STAN D
-0.08214
-0.477
0.63327
0.93056
2,208
0.02726
0,55729
D _S TA N D
0,23382*
C IT Y l
-0.00109
-0.006
0.99534
0.23264
C IT Y 2
-0.34891*
- 2 .8 8 6
0,00390
0.29167
C IT Y 3
0.10299
0.640
0.52245
0.18403
R esults c o rre c te d fo r h c le ro sc e d a slic ity : Q re u sc h -P ag a n chi-sqviared (D F ) = 5 9 .3 5 0 5 (2 0 ).
N o te:
+ d e n o te s s ig n ific a n c e a t the 1 p - r c en t e rro r lev el.
t
d e n o te s s ig n ific a n c e a t (lie
5
p e r c e n t e rro r lev el.
* denotes signiricance at (he 10 per cent error level.
Measuring User Benefits from Cleaning-up the Ganges /
129
T a b l e 6.4
E s tim a tio n R esu lts for W illin g n ess-to -p ay fo r 1985 Q u ality
Dependent variable = P LO G
= 15.85046
F[20, 485]
= 4.567744
Observ'alions
= 506
Adjusted R^
= 12.38037
Econometric package = L IM D E P 6,0
Variable
C oefficienl
1-ratio
Constant
-54.465001
-1.861
0.06271
ILO G
4.33890f
1.953
0.05087
9.8687
A LO G
9.53710
1,378
0.15811
3.7849
4.53370
1,412
0,15783
1.4757
E LO G
9.33070
0.588
0.55660
2.7258
IL O G l
-0.39131*
-2.926
0.00344
49.2210.
ILO G A
0.3J567
1.129
0.25878
37.3740
ILO G S
-0.28973+
-1.727
0.08415
14.2280
IL O G E
YI.34576
-0.473
0.63621
26.9750
A LO O A
-0.83047
-0.647
0.51745
7.1983
ALO G S
-41,55527
-1,473
0.14084
5.5896
ALO G E
-3.156501
-1.737
0.08238
10.3150
SLO G S
0.11091
-0.320
0.74S83
1.2455
SLO G E
0.40150
0.428
0.66867
4.0014
ELO G E
2.50950
0.395
0.69279
3.7269
S LO G
■
'
F ro b
>A-
M ean o f X
V IS IT
-0.47831*
-2.995
0.00274
0.65415
B .S T A N D
-0.14992
-0.705
0.4S10S
0.92885
D _S TA N D
0.14928
1.223
0.22148
0.57115
-0.29921 :
-1.452
0.14636
0.25296
C IT Y 2
-4). 16378
-1.118
0.26337
0.27273
C IT Y 3
-0.18289
-0.90S
0.36362
0.18379
C lT Y l
Results corrected for heleroscedasticity; Breusch-Pagan chi-squared (D F) = 37,3230 (20).
N o te:
* d e n o te s s ig n ific a n ce at the 1 p e r c e n t e rro r level.
t d e n o te s sig n ific a n c e a t ilic 5 per c e n t e rro r level,
L d e n o te s sig n ific a n c e a t th e 10 p e r c e n t e rro r level.
130 / Cleaning-up the Ganges
The valu es taken by the index in the three scenarios are:
Best Quality = 100,00;
1995 Quality = 48.63;
1985 Quality = 31.46.
The second new variable is the dependent variable in the regression
equation, L o g (B lD ) (or L B ID ), where
B ID is B E S T M A X when Q U A L IT Y is 100;
B ID is C U R R M A X when Q U A L IT Y is 48.63; and
B ID is P A S T M A X when Q U A L IT Y is 31.46.
The sample used in the regression, thus, is three-times the AM Users
sample used in the previous regressions. The actual specification o f the
regression equation (in Cobb-Douglas logarithmic-linear form) is:
G enera! F o rm
B ID = / ( Q U A L IT Y , IN C O M E , A G E , S IZ E , E D U , V IS IT , B _S T A N D ,
D „S T A N D , C I T Y 1, C IT Y 2 , C IT Y 3 ),
(6.3)
C o b b -D o u g ta s (L o g a rith m ic-L in e a r) Form
L B ID = a -H C q Q LO G + a i IL O G -i- « a A L O G + «s S LO G
-t- ae E L O G + P, V IS IT -i- P 2 B _S T A N D + P 3 D _S TA N D
+ 6 , C I T Y l + 6 2 C IT Y 2 + 6 3 C 1TY3 -1- £
(6.4)
where, as before,
L B ID
= Log B ID
Q LO G
= Log (Q U A L IT Y );
IL O G (or Log IN C O M E ) = Log (per capita annual household
income from all sources),
A L O G (or Log A G E )
= Log (Age of die respondent);
S LO G (or
= Log (Size of the household: with
members below the age of 18 converted
to adult equivalent units);
Log S IZ E )
E L O G (or Log E D U ) ;
= Log (Education level of the respondent,
in years);
V IS IT
= Dummy variable: Whether respondents
had visited the Ganga in the past 10 ■
years: Y E S = 1; NO = 0;
B _S T A N D
= Dummy variable; Whether respondents
felt rai.sing water quality to bathing
standards was worthwhile, irrespective
of cost; Y E S = 1;
-
Measuring User Benefits front Cleaning-up the Ganges ! 131
.
D _STA N D
= D u m m y variab le: W hether respondents
fe lt raisin g water q u ality to drinking
standards was w orth w h ile, irresp ective
o f cost; Y E S = 1; N O = 0;
C IT Y l
= D u m m y variab le: W h eth er the respond­
ent resided in the city o f A llah ab ad ;
Y e s = l ; N o = 0;
.
C IT Y 2
■
= D u m m y variable; W hether the respond­
ent resided in the c ity o f V a ra n a si:
■
Y e s = I ; No = 0;
,
C r r ,Y 3
= D u m m y variable: W h ether the respond­
ent resided in the c ity o f C alcu tta :
Y e s = f ; No = 0.
T h e resu lts from this regression arc detailed in T a b le 6.5.
T a b l e 6.5
E stim a tio n R e su lts fo r M od el w'ilh Q u ality as a R eg ressor
Dependent variable = L B ID
R**
=33.3227
F(zero slopes)
= 74.7823
Variable
CO .N STAN T
Obser\'alions
= 1658
Adjusted R=32.8771
Econometric package = T S P 4.3
C oefficient
l-sia iislic
-8.667210*
-10.17430
Q LO G
1.650770*
25.69260
ILO G
0.257506*
ALO G
0.220183t
S LO G
0.379225*
5.19918
ELO G
1.315010*
5.446S9
V IS IT
B _STA N D
D .S T A N D
;
•
5.21345
1.84446
-0.115655
-1.29187
-0.057098
-0.53275
0.207632*
3.19731
C iT Y l
-0.042507
-0.37118
C IT Y 2
-0.276524*
-3.59519
C IT Y 3
0.043403
S ta n d a rd e rro r s are tic tc ro s c e d a stic c o n sis te n t (H C T Y P E = 2).
N o te:
* d e n o te s s ig n ific a n c e at the 1 p e r c e n t e rro r level,
t d e n o te s s ig n ific a n c e al the 5 p e r c en t e rro r level,
4 d e n o te s s ig n ific a n c e at the 10 p e r cent e rro r level.
0.41013
132 / Cleaning-up the Ganges
These results have several noteworthy features. F irst, the value o f the
Adjusted
is s ig n ifica n tly higher lhan those obtained for the earlier
regressions fro m the m o d el w hich did not take riv er w ater q u ality as an
independent v ariab le (regressor). The value for the current regression is
w e ll-w ilh in the acceptable range for cross-sectional data.
Second, alm ost all the variables are hig h ly statistically-significant
(indicated by the high t-ratios). A lo n g w ith the fact that the A djusted
is high (as w e ll as the F -ratio , which represents the o verall significance
o f the regression), these high t-ratios m ake the interpretation o f the
results m ore-Tneaningful.
T h ird , and quite im portant, all the variables have the expected signs:
income is expected to be positively related to W T P , as are size o f the
household and the educational level. The educational level may also be
interpreted as a proxy for the environm ental awareness o f the respon­
dent, although this relationship need not obtain in general.
The elasticity o f W T P w ith respect to incom e is the value o f the es­
timated c oe ffic ie n t o f the variable IL O G (the natural logarithm o f annual
gross household incom e from all sources), w hich, in this case, is 0 .2575
per cent. T his means that i f incom e rises by one per cent, W T P for better
water q u ality in the Ganga may be expected to rise by 0 ,2575 per cent.
Although ihis i.s perhaps lo w in comparison lo the com parable elasticities
(in the context o f im provem ents in freshwater q u ality ) in developed
counu-ies, this is not unusual, especially for non-user benefits.
T he variab le A G E is positively correlated w ith incom e, and sig­
nificantly so, w hich is in contrast to the results obtained in a sim ilar
regression in the case o f the contingent valuation survey for non-user
benefits.
R eplacing all the right-hand side variables by their mean values and
setting the Q U A L IT Y index equal to 100 gives the estim ated mean W T P
for Best or B ath ing Q u ality, w h ile setting the Q U A L IT Y index equal lo
48.63 gives the estim ated mean W T P for Current (1 9 9 5 ) Q u a lity, and
setting it to 3 1 .6 4 gives'the estimated mean W T P for Past (1 9 8 5 ) Q uality,
The estim ated W T F per household for each o f these water quality
levels, from using these four different methods is presented in the fo l­
low ing section.
ESTIM ATES OF PE R -H O U SE H O LD W TP FOR L E V E L S A N D C H AN G ES
IN R IV E R W A TER Q U A L IT Y
Table
6.6
details
the
three
per-household
w illin g n ess-to-p ay
es­
timates that result from using the sample m edian and the estimated mean
M easuring User Benefits fro m Cleaning-up the Ganges / 133
from
both, the econometric model without water quality and the
econometric model with water quality, for each o f tlie three levels o f
water quality.
T a b le
6 ,6
Willingness to Pay for A ll User Households
I_______________________[Rupees per household per annum (at 1 9 9 5 -6 p rices)]
L e v e ls o f r iv e r w a te r q u a lity
B c j Ls f a r h o u se h o ld
t'-YR c a lc u la tio n
B e st
1995
1985
q u a lity
q u a lity
q uality
q u a lity
w ilh G A P
w ith G A P
w ith G A P
w ith ou t G A P
Sam ple median
500.00
2 0 0 .0 0
Estirr.ire d mean
(m ocei w ithout quality)
533.31
219.44
Estirr.m ed mean
(m ode. W ith quality)
581.59
167.23
1995
1 0 0 .0 0
75,38
93.28
71.12
T h ; cer-household estimate o f direct-user benefits to urban literate
bouser.olds o f achieving bathing quality (the ultimate G A P objective)
range; between the sample median figure o f Rs 500 per annum, to the
esiirnuted mean value from the econometric model with water quality
included as an explanatory variable, Rs 581.59 per annum.
Tr.e value o f user benefits from the cument (1995) level o f water
qualiq ranges similarly between Rs 167.23 to Rs 219.44 per household
per ar.r.um, w hile the user benefits from the pa.st (1985) quality ranges
from ?vi 7 5.4 2 to Rs 100 per household per annum.
The econometric model w ith the quality variable makes possible a
further useful calculation: the user benefits from the scenario which
would exist currently (in, 1995) without the GAP, with the Index o f
Water Q uality set at 30.62 (the index value for water quality in 1995 if
the Ganga Action Plan had not started). Setting the Q U A L IT Y variable
equal to 30.62 yields the level o f annual user benefits each household
could expect to receive in the absence o f the Ganga Action Plan, which
is the number in the bottom right-hand corner o f the table: Rs 71.12,
In addition to these values, incremental values o f W T P can also be
generated. F or instance, the difference between the W T P for 1995
Qualm.' and 1985 Quality gives the value o f benefits (per household per
134 / Cleaning-up the Ganges
annum ) fro m the im provem ents in water q u ality carried out between
1985 and 1995. S im ila r ly , the differen ce between the W T P for B e s t or
B ath ing Q u a lity and 1995 Q u a lity , gives the value o f potential benefits
from cleanin g the riv e r up to uniform bathing q u ality throughout the
river. T h e se increm en tal value calcu latio n s are presented in T ab le
6 .8
for each o f the fo u r sets o f estim ates o f household w illingness-to-pay
given in T a b le 6.7.
T a b l e 6.7
W illin g n e ss-to -P a y fo r Im p ro vem ents in
R iv e r W ater Q u a lity by A ll U sers
[Rupees per household per annum (at 1995-6 prices)]
B a sis f o r h ousehold WHP calculalion
C hange ill wa/ers
cjuality level
1985 to bathing qualily
1995 lo bathing quality
1985 to 1995 quality
Simulated to actual (1995)
qualily
Simulated (1995) lo
bathing quality
E siim a ted mean
Sam pie median
400.00
300.00
100.00
M o d el withoia
M o d el with
quality
quality
457.20
313.30
143.89
488.30
414.35
73.95
96.11
-
-
510.46
Tab le 6 . 8 sho w s that the value o f the benefits to an average urban
Indian literate and em p loyed household’' in cities along the riv e r G an g a,
o f iin p ro v iu g riv e r w ater q u ality from the 1985 level to bathing quality
(the ultim ate o b je c tiv e o f the G A P ) ranges from R.s 400 to R s 4 8 8 .3 0
per annum .
Th e estim ated benefit o f raisin g water q u ality from the current (1 9 9 5 )
level to the bathing q u ality ranges from R s 300 to R s 4 1 4 .3 5 per
household per annum , and that o f increasing water q u ality in the G anga
from 1985 to the present (1 9 9 5 ) ranges from R s 73.95 to R s 143.89. T h is
last valu e is one interpretation o f the benefit to the average literate and
em ployed urban Indian household o f having the G anga A ctio n P la n .
‘‘when reference it made lo a household being ‘educated’ or ‘literate’ , it is
simply to indicate that the head of the household or the respondent from the
household (above 21 years and responsible enough to make financial decisions
for the household) is either educated or lite r a te .
.
Measuring User Benefits from Cleaning-up (he Canges I 135
A n oth er measure o f the estim ated benefit o f having the G A P is the
d ifference between the benefits that would accrue to households in
1995, had the G A P not been-irnplem ciiled (the without G A P scenario)
and those that have actually accrued in 1995 as a result o f the G AP. This
calculation is o n ly possible using the m odel vvilh quality included as an
explanatory variable, and the figure is Rs 96.11 per household per
annufn.
F in a lly , this estimation o f benefits gives another measure o f the total
benefit the G A P can be e.xpecled to have, once the objective o f u n ifo rm
bathing q u ality is achieved. T h is is the difference between the b en efit
that )vould have accmed In 1995 in the absence o f G A P and the total
benefit o f achieving bathing quality, which is the number in the bottom right hand corner o f the table: Rs 5 1 0 .4 6 per annum per household.
From each o f these household W T P s , a population estimate has to be
com puted in order to generate total W T P for each level o f water quality
and for the incremental benefits calculated.
A G G R E G A T E W lL L lN G N E S S -T O - P A Y F O R WATER Q U A L IT Y L E V E L S
AN D IM PR O V E M E N T S
There are tw o stages in the extrapolation o f household willingness-topay ( W T P ) estimates to the population: first, calculating the size o f the
target population sampled; and second, m ultiplying the household w ill­
ingness-to-pay by the num ber o f households in the target population.
K eeping in mind that the population sampled is the urban literate
population in cities along the river, (jie steps detailed in Table 6.S yield
the desired total population size.
T
a iil b
6.8
The Total Population Sam pled— U rban Literate Households in In d ia
Den.sity o f Urban Households in Districts
(in UP. Bihar, and W B ) through w hich the Ganga flows
Length o f the Ganga River (in km )
22.33
2525 km
Area w ith in 0.5 kilometres of the rive r on either side
2525 k n ?
Num ber o f urban households w ith in 0.5 km o f the river
(household density X :ifca
aica
x area 1= 22.33 x 2525)
56,383.25
Urban literacy rate (average o f the rate in the three states)
0.58
Number o f literate urban households w ith in 0.5 km o f the river
(56,383 x 250.58)
37,212.95
136 / Cleaning-up the Conges
Using this total population figure of 37,212,95 households, the
household wilHngness-lo-pay figures (in terms of Rupees per household
per annum) can be aggregated into a population or total willingness-topay (Rupees per annum). These figures, for each set of household w ill­
ingncss-to-pay estimates generated in Tables 6.6 and 6,7 above, arc
presented in Tables 6.9 and 6.10.
T a b l e 6.9
Aggregate Willingness-to-pay for Ganges Water Quality Levels
[M illian Rupees per annum (at 1995-6 prices)]
B a s i s f o r h o u s e h o ld W T P c a lc u la tio n
E s tim a te d m ea n
L e v e l o f w a t e r q u a lit y
S a m p le m e d ia n
M o d e l w ith o u t
M o d e l w ith
q u a lity
q u a lity
16.4
1 7 .4
19.0
Current (1995) quality
6.5
7 .2
5.5
Past (1985) quality
3.3
2 .5
3.1
-
-
2.3
Bathing q ua l i t y
Simulated 1995 quality
(without G A P )
•
Table 6,9 presents the aggregated value o f benefiis to urban literate
and employed households for different levels of water quality, including
the simulated 1995 quality in the absence of the Ganga Action Plan.
This illustrates that the value of aggregate benefits from a Ganga that
is cleaned up to bathing quality lo the urban employed and literate
population in India living in cities along the banks of the river ranges
from Rs 16.351 million to Rs 19.019 million per annum.
The value o f aggregate benefits to this population from the current
(1995) quality of Ganga ranges from Rs 5.468 million to Rs 7.172 m il­
lion, while that from the 1985 quality of Ganga (that is before the GAI^)
is between Rs 2,466 million to Rs 3.270 million. An additional figure
is available from the model with quality included as an explanatory
variable, the aggregate value of benefits from the level o f water quality
that would have existed in the Ganga in the absence of the GAP. This
value'is Rs 2.325 million per annum.
.
M easuring User Benefits from Cleanmg-up the Ganges / 137
T
able
6. l o
Aggregate Willingncss-to-pay for Changes in Ganga Water Quality
■
Levels by Users
fRupees million per annum (at 1995-96 prices)]
B a s i s f o r h o u s e h o ld W T P c a lc u la t io n
C h a n g e in w a t e r q u a lit y le v e l
E s t im a t e d m e a n
S a m p l e ---------------------------------------------------n ie d io n
M o d e l w ith o u t
M o d e l w ilh
q u a lity
q u a lity
U s e r s 'w it h in o n e k in .
I9S5 lo bathing quality
26
30
32
1995
20
21
27
10
bathing qualily
19S5 to 1995 quality
Simulated to actual (1995) quality
■
6
-
Simulated (1995) lo bathing quality
9
5
-
6
-
33
P ilg r im s
1985 to bathing quality
5455
6213
6648
1995 lo bathing quality
3800
3956
5377
1985 to 1995 quality
1665
2257
1271
Simulated to actual (1995) quality
-
-
1550
Simulated (1995) to bathing quality
-
-
6927 ■
■
T o ta l
19S5 lo bathing quality
5491
6243
6680
1995 to bathing quality
3S20
3977
5404
1985 to 1995 quality
1671
2266
1276
Simulated to actual (1995) quality
-
Simulated (1995) to bathing quality
-
’
-
1556
-
6960
Table 6.10 shows the aggregated value of the benefits of changing
level of water quality in the Ganga. If water quality in the river is
improved from the 1985 level to bathing quality (the ultimate GAP ob­
jective), the incremental benefit for users within one kilometre from the
Ihe
period of the inception of GAP would be between Rs 26 million and Rs
32 million. This is one interpretation of the overall benefit from the
GAP (Phases I and II) lo the urban employed and literate population
living on the banks of the river Ganga.
I f river water quality was improved from the current (1995) quality to
138 / Cleaning-up the Ganges
bathing qu ality, the value o f addilional benerus to users w ith in one
kilo m etre generated ranges between Rs 2 0 m illio n and Rs 27 m illio n per
annum. T h e corresponding range o f values for additional benefits to
pilgrim s is between Rs 3 8 0 0 m illio n and Rs 5377 m illio n , g iv in g total
values in a range from Rs 3 8 2 0 m illio n lo Rs 5 4 0 4 m illion per annum.
T h e v alu e o f additional user benefits to urban literate and em ployed
households liv in g along the riv e r o f actual riv er water quality im p ro v e ­
ments in the Ganga from 1985 to 1995— the period o f interest in the
present evaluation study— ranges from Rs 5 m illio n to Rs 9 m illio n per
annum.
W hen
pilg rim s
are included,
the total
range is from
Rs
1276 m illio n to Rs 226 6 m illio n per annum.
F u rth er, the benefits o f having the G A P today could be interpreted
as the valu e o f the aggregate increm ental benefits between the value
given fo r actual current (1 9 9 5 ) q u ality and lhat simulated current (1 9 9 5 )
quality (that is the value, had the G A P not taken place). F or users w ith in
one k ilo m e tre this is calculated as Rs 6 m illio n per annum. W ith
pilgrim s included, the total becomes Rs 1556 m illio n per annum.
N o te that there are two interpretations o f the benefits o f having the
G A P today: (1 ) the increm ental benefits from 1985 to 1995; and (2 ) the
d ifference between the benefits from the actual current (1 9 9 5 ) quality
and those fro m the simulated current (1 9 9 5 ) quality (w ithout the G A P ).
Using the results from the econom etric m odel w ith quality included as
an exp lan ato ry variable, the value for users w ithin one kilom etre for (1)
is Rs 5 m illio n and for (2) is Rs 6 m illio n . T h e latter is thus around 2 0
per cent higher than the form er, w hich is the value based on the d if­
ference between actual 1985 and 1995 w ater qualities. W hen p ilgrim s
are included, the corresponding total values are (1) Rs 1276 m illio n per
annum and (2 ) Rs 1556 m illio n per annum.
T h e benefits o f having the G A P (Phases I and II) may be interpreted
as the d ifference between tiie value o f aggregate benefits from the water
q uality sim ulated for 1995 and those from having uniform bathing
q uality in the river. This 4s Rs 33 m illio n per annum for users w ith in
one k ilo m e tre and Rs 6927 m illio n per annum for pilgrim s, g ivin g a
total o f Rs 6 9 6 0 m illio n per annum .
N o te tliat there are again tw o ways o f interpreting the b en efit o f
having the G A P (Phases I and II) : (1 ) as the difference between the past
(1 9 8 5 ) valu e o f benefits and those from achieving u n iform bathing
quality, w h ich
is Rs
32
m illio n per annum
for users w ith in
one
k ilo m e tre and Rs 6 68 0 m illio n per annum including pilgrims; and (2 ) as
the d ifference between the sim ulated (1 9 9 5 ) value o f benefits and the
Measuring User Benefits from Cleanmg-up the Ganges
/
139
benefits from having uniform bathing quality water in the river, whi ch
is Rs 33 mi llion per an nu m for users within o n e kilometre and Rs 6960
million p e r annum including pilgrims. T h e latter total value is a p­
p roxim ately 4 per cent hi gher than the former.
•
C O M PA R A BLE EST IM A T ES OF W T P FO R C LEA N ER
WA tIe R Q U A L IT Y
.
■
There are some w illingncss-to-pay estimates for im proved water quality
fro m ,valu ation studies done in developing.countries.^These are not a l­
ways, directly com parable, but are presented here to provide a com para­
tive perspective.
URUGUAY
A contingent
valuation
survey earned
out among
1500 ran do m ly'
sampled households in M on tevid eo city in U ruguay in 1 9 8 8 -9 sought
to measure
w illingness-to-pay
(W T P )
for
improvements
in
water
quality at beaches near the mouth o f a riv er carrying untreated sewage
(M c C o n n e ll and D ucci, 1989). A project to divert untreated'w ater far
enough aw ay from the beaches to elim inate the pollution o f the beaches
near the m outh o f the river would allow sw im m ing and other water
(recreation) activities. The household W T P for these direct-user benefits
was U S $ 14 per annum w hich, at the 1996 exchange rate o f Rs 35 lo a
US dollar, is Rs 4 9 0 per year. This was deemed to be low by local
standards. O n e explanation was that the chosen payment vehicle o f a
m unicipal tax was an unpopular option and may have induced strategic
bidding by llic respondents.
T H E P H IL IP P 1 N E .S
A contingent valuation survey o f 581 households in D avao C ity in the
Philippines in 1992 sought to measure W T P for im proving water quality
to s w im m ing (bathing) q u ality in the river and along beaches close to
the city (C h oe, W h ittin g to n , and L au ria, 1994). N o specific plan to
clean up the beaches was outlined. Households which used one o f the
^AIl the studies considered here are reported in a recent draft report to the
United Nations Environment Programme, which is listed in the bibliography
under Pearce et al. (1994).
140 / Cleaning-up (he Ganges
main beaches in the area. Times Beach, were w illin g to pay about 30
pesos a month or 360 pesos a year for Ihese direct-user benefits. A t
1992 exchange rates o f 25.512 pesos per US dollar and Rs 26.412 per
US dollar, this amounts to Rs 372 .7 per year or Rs 481.61 per year at
1995 prices. Again, this was considered a low value, and a likely ex­
planation was that reducing water pollution was not a high priority for
the residents o f the area.
C H IN A
A valuation o f the benefits o f improving water quality in Lake Tai in
the W u xi province o f China to .swimming quality was carried out in
1 9 9 1 -2 among residents o f the neighbouring community (Abelson,
1996). Households living nearby were w illing to pay US $ 15 per
annum for these direct-user benefits which, at the current exchange rate
o f Rs 35 to 1 U S dollar, is about Rs 525 per year.
EGYPT
Direct-user benefits from improvements in water quality in L ake T im sah in Ism ailia, Egypt were estimated in 1987 (Luken, 1987; quoted in
Winpenny, 1991). Using (be travel cost approach, Ihe consumer surplus
measure o f annual direct-user benefits from (he clean-up was £ (E g yp ­
tian) 16.35 to 21.40, A t 1987 exchange rates o f 1.273 Egyptian pounds
aer U S dollar and 12.968 Z^upecs per US dollar this amounts to a range
Tom Rs 166.51 to Rs 217.99 or from Rs 346.72 to Rs 453.91 at 1995
prices.
:O L O M B I A
fhe direct user-benefits to households from cleaning up a feeder river
nto R io Bogota which skirts Bogota, the capital city of Colombia, were
estimated in a study done at the end o f the 1980s (O D A , 1990). The
total household willingness-to-pay for improved health and amenity
benefits, as well as for the convenience of being connected to a modern
sewerage system, worked out to USS 41 m illion per annum. A t the 1996
exchange rate o f Rs 35 to a U S dollar, this is a to ta l o f Rs 1435 m illion.
H ow ever, this was not an estimation based on household responses, but
5 per cent o f average household income in (he area was taken to be the
assum ed willingness to pay (W inpenny, 1991: p. 196).
F or purposes o f comparison, these estimates arc presented m Table
6.11, along with the relevant estimates from the present contingent
valuation survey o f direct-user benefits.
'
M e a s u r i n g U s e r B e n e f i t s f r o m C l e a n i n g - u p the C a n g e s ! 141
T a b l e 6.11
Comparable Estimates o f W T P for Direct-User Benefits from
Improved Water Quality
C o u n try
1t
Year
\
H o u s e h o ld W i T
T o ta l m P
( R u p e e s p e r h o u s e h o ld
( R u p e e s m illia n p e r
p e r annum }
annum )
Um guay
1988-9
490
The Philippines
1992
481
Chinq
1991-2
525
Egypt
1987
347-454
Colom bia
Late 1980s
India
1996
-
.
1435*
4 S S -5 1 0
16-16.5
*based on assumed not estimated willingness-to-pay.
CONCLUSIONS
This study is an attempt lo estimate the user benefits o f cleaning a m ajor
water resource like the Ganga, which has a very high economic sig­
nificance in India. The Contingent Valuation M ethod is used with a
carefully designed que.stionnaire for surveying a sample o f urban
households living near the banks of the river in the cities o f Calcutta,
Varanasi, and Allahabad. It attempts to measure only user benefits ac­
cruing to urban populations living near the Ganga as it flows through
the three states o f U ltar Pradesh, Bihar, and West Bengal. There can ob­
viously be substantial user benefits accruing to rural households living
near the river in its entire course of 2525 kilometres, but this study docs
not measure those benefits.
As in the case o f the valuation by urban households o f non-user
benefits
from
levels and changes in water quality in (he Ganga
described in the previou.s chapter, urban hotiscliolds deriving direcl-uscr
benefits have also shown consistent preferences for the quality o f water
in the Ganga. The estimated willingness-to-pay (W T P ) function relating
household W T P to the quality o f water in the river and socio-economic
variables representing household characteristics shows that household
W T P increases with the quality o f the river, as w ell as with the income
size and environmental awareness o f households. The education level
of the respondents is once again a proxy for their environmental aware-
142 / Cleaning-up the Ganges
ness. A n d ihe f a d that the sample consisted o f households from the
literate urban population in the country no doubt played a m ajor ro le in
generating the good response rate o f the survey.
As in the case o f the contingent valuation survey o f non-user benefits
reported
in
the
previous
chapter
the
estim ation
results
from
the
econom etric m odel w ith w ater quality included as an explanatory v a ri­
able proved a good measure o f fit to the data w ith all the variables
having the correct sign (denoting consistent preferences) and h ig h ly
statistically significant coefficients. Calculations o f household and ag­
gregate w illin g n ess-to -p ay for different levels and for changes in riv er
water q u a lity are based on the results from this model.
The m a in results are as follows. T h e estim ate o f w illingness-to-pay
(W T P ) fo r user benefits from bathing q u ality water is Rs 5 8 1 .5 9 per
household per annum , which aggregates (0 Rs 19 m illion per annum for
the 3 7 2 1 3 houseliold in the target population o f literate urban residents
in the m a jo r cities in the three states o f U tta r Pradesh, B ihar, and West
Bengal w h o live w ith in 0.5 kilom etres o f the river.
W illin g n es s -to -p a y for benefits from current (1 9 9 5 ) water q u ality in
the G anga is Rs 167.23 per hou.sehold per annum , which totals to Rs 5.5
m illio n per annum.
S im ila rly , household W T P for the direct-user benefits from the level
o f w ater q u ality existing in 1985 (that is before the G A P started) is Rs
93,28 per annum , w hich sums to Rs 3.1 m illio n per annum.
R ev ie w ers o f the study noted that the W T P figures from the user and
non-user surveys are sim ilar (around Rs 5 0 0 for bathing water quality
and around Rs 150 for current water q u ality ). O ne m ight expect higher
values fo r users than for non-users, and one possible explanation o f­
fered w as that the average incomes o f literate households along the
Ganga are lo w er than those o f households liv in g elsewhere (since U P
and B ih a r are poor states). Thus, users m ay be w illin g to pay a higher
percentage o f incom es, even if the absolute amounts are sim ilar to other
places. T h e average p e r capita incomes o f user households is Rs 27,771
com pared to Rs 3 6,4 67 for non-users, which is consistent w ith the
above observation. Furtherm ore, it has been suggested that there m ay
have been questionnaire design problem s that could have resulted in the
sim ilar figures. In this context, it is interesting to note that the values
obtained fo r user benefits are not dissim ilar to other studies. F o r the
G o m ti, fo r exam ple, a recent D F ID study reported a W T P o f between
Rs 100 and Rs 2 0 0 in user benefits for a cleaner river. This suggests
that the bias referred to above is lik e ly to be lim ited.
Measuring User Benefits from Cleaning-up the Ganges I 143
As in the case o f the non-user analysis, the econometric model w ith
water q u ality makes a further calculation possible. Using an In d ex o f
R iv er W a le r Q u a lity developed based on the data from the N atio n al
Rivers Conservation D irectorate, M in is tiy o f Environm ent and Forests,
and sim ulations on the W ater Q u a lity M odel done by the Industrial
To xicolo gy Research Centre, L u ck n o w
(see previous chapter), the
d ire d -u s er benefits o f the w ater q u ality that would have existed in 1995
in th e a b s e n c e o f th e G A P can
be worked out. In this simulated
scenario, in which there is no G A P , the estimated household W T P for
1995' q u ality o f the river is Rs 7 1 .1 2 per annum, which aggregates to
Rs 2:3 m illio n per annum.
-
U sing these mean W T P values for user benefits, the benefit o f
having the G A P today can be estimated in two ways: (1 ) the increm en­
tal benefits from
1985 to 1995; and (2 ) the difference between the
benefits fro m the actual current (1 9 9 5 ) quality and those from the sim u­
lated current (1 9 9 5 ) quality (w ith o u t the G A P ). The form er is Rs 2.4
m illio n p er annum and (he latter is Rs 3.1 m illion per annum, the latter
being about 30 per cent higher than the former.
'
S im ila rly the benefit o f having the G A P (Phases I and I I ) can be in ­
terpreted in tw o ways: ( I) as the difference between the past (1 9 8 5 )
value o f benefits and those from achieving uniform bathing quality; and
(2) as the d ifference between the sim ulated (1995) value o f benefits and
the benefits fro m having u n iform bathing quality water in the river. The
form er is Rs 16 m illio n per annum , w liiie the latter is about 4 per cent
higher at R s 16.7 m illio n per annum,
A
com parison
o f these
W TP
estimates
with
those from
other
developing countries, o f dircct-user benefits o f im provem ents in water
quality levels, shows that the values obtained in thi.s contingent valua­
tion are broadly comparable,
v o L U iv iE
7
5
r v J U fv iB E R 3
A U G U S T
ig g g
R obert T, Deacon
D c fo r c s la lio n and O w n c is fiij?
3 4
D a r i u s M . A ila m s , R a lp h J . A lig , I tr u c e A . M c C a r l,
J o h n M . C irllitw fiy, a n d S le v e /i M . W in n e tt
M iiiiim iin Co.M .S lrn lc g ic s ('(»f Scin K -slci ing C a ib o ii in I'o rc s ls
360
T tio m a s J , M i c e ii a n d li a ll il e e ii S c g c rx a it
T liic s lio k i R u le s Cur I'lm d in g Un\ im iin ie n la l M a n d a lcs
375
D a v id A . I ta r /n n a n
U n v ii'o n n ie n ia l C u n N im iiiis on
390
I ly d ru p o w c r
O p e ia liu n s
I-a iir a M c C a n n a n d K, W iU unn f a s t e r
T ia n .s a c liu n C u s is u l'K c tlu u in g I ’ hosphorous P u lh tliu ii
402
A n d r e w R . W a tk in s
Jn)))aL'ls u f L a n d D cvL'Ju p in ciK ( li.irgc.s
41 5
A lf q n s W e e ts in k , S te v e C la r k , C a h in i G . T iirv e y ,
a n d R a k h a l S arker
T h e E l l c c i of A g r ie u lliiia l I’u lie y un F a rm la n d V a lu e s
425
J o h n F a u x a n d G r e g o r y M . I ’c n y
F s lim a tin g Iir ig a lim i W a lc i V a lu e U s in g lle d u iiic
J’ jie e A jju jy s is
4 4 0
J o h n C. W h ite h e a d a n d T h o m a s J . I l o b a n
T c n ip u ra i R e / ia l)ility in C u n liiig e ii; V a /u aiio n
453
K . Ii. M c C o n n e ll
H u u s c liu ld L a b o r M a ik c l C I io il l -v aiu l ihc D em an d
fo r R e c re a lio n
V
J
S
YEA R EJ
O F
R tS l
A R C IH
.
4 5 5
S C H O L A R S H H -
P u Ii I lsI iccI hy (lie Univei.sify of W is c o ii.s iii P re s s
Estimating Irrigation Water Value Using
Hedonic Price Analysis: A Case Study
in Malheur County, Oregon
J o h n F au x a n d G regory M. P erry
ABSTRACT. H e d o n ic p r ic e n iu d ysix is iip p lied
to a g r ic u ltu ra l la n d sa les lo re v e a l flic iiiiplicif
m a rk e t p r ic e o f w a te r in irrig a tio n . T his p ro v id e s
p ric e in fo rm a tio n , w here olhenvl.se ab.scnt, w hich
ca n fa c ilita te rea llo c a tio n o f w a te r .supplies to
m e e t groiVing demand.';. T he f o i h o e to in c lu d e
a va ila b le in fo n n o lio n on so il q u a lity, o n im p o r­
ta n t d e te rm in a n t o f o g ric u lln rn f la n d vohte, re.sull.s in e rr o n e o u s concht.sion.s. J o in t testing o f
hetero.shednsticity n in l fn n c lio n n l fo n n is d e m o n ­
strated. The va lu e o f irrig a tio n w n fcr in th is iacnlio n is e stim a te d a t $ 9 fo r a n n c rc -fo o t n n the
lea st p ro d u c tiv e la n d irrignted, m id up to $■!•} /ic r
acrc-jfoot o n th e m o st p ro d u c tiv e tnnd.
Q15)
I, IN T K O U U C T T U N
Tfie cleinand for w a lcr in (lie vvc.slcm
U iiiied S tales is g io w iiig lun only in jnagnilude, but also in variety. G ro w in g cjlic.s .seek
greater vo lu m es to satisfy new cii.slom cis,
w ater-based reeication is iiicrca siiig . and
pressures ^iiie inoiinting to p icserv e and re­
store cn vito n in cn ia l system s dependent on
strcam flow s. T h e supply lo meet (licsc de­
m ands is lim ited. G ro w in g seaieity o f good
dam sites, nagging federal funds for dam
construction, and em erging co ncern s for nat­
ural system s have esse n tia lly curtailed tlic
ab ility to in crease the supply a vailab le. F o cu s
has shifted to identification and developm ent
o f m eans to reallo cate w ater supplies from
Ih c ir existing , p rim a rily a g ricu liu ia l uses, to
other uses with greater eco no m ic and/or so ­
cia l value.
R eallo catio n o f water lighLs i.s a d ifliciilt
task, te ch n ically , le g ally, and p o litically. A s
a consequence, in most regions of the Wc.sl,
llicre is very little buying and sellin g of w alcr
a.s a separate com m odity. W ater is usually
sold along with (he land on w hich ii i.s ap­
plied. In .some slale.s ilic ie is a lim ilcd m aikct
w ithin a g iven water distribution .system
w here shares in the water rights o f that sy s­
tem a ic fic c ly m obile lo other jja rc cls o f Ian
.served by that system . In Oregon, lliis lim ite
m arketing o f water is constrained by la'
stipulating irrigation lights to be appurtenai
lo sjiccific parcels o f land.
Ab.senee o f a w elM 'uiiclioning m arket i.
Wilier crc jilcs two problem s: efiicie n e y gain
iire (o.sl due to the d iflic u lly o f reallociition
Jtiid price .sigiial.s lhai aid reallo calio n arc ab
.senl. h'stimatcs o f w;i(er price arc u.scfui ii
many veniures such ;is pureliii.se o f w iitcr tt
provii.!e m unicipal w aier su pp ly, negolialioiij
invo lving Indian liih iil ehiim.s lo rc.scrvec
w alei riglit.s. p iiicliiisc o f water lo aid in re­
co ve ry o f eiuliiiigered li.slicrie.s, atic.1 iinalysi.s
o f proposed w iiier devciopinent p io jccts such
as (.[am co n slru ciio ii or transbasrii tliv cisio n
('I'uung 1978: C o lb y 1989). In ihc case under
.sImJy, water use is jjrim uriJy for irrigiilion
w liile jircssures mount lo allocate m ore o f the
aviiilab ic su jip ly to aid salm on iiiigration and
.survival.
T h e im p licit price o f irrigation water can
he revealed by licdoin'e an aly sis o f irrigated
farm property sales. T h e sale p rice o f the
bundled good— irrigated farm projrerty—
can be disaggregated using iicd o nic an aly sis
lo leveal the im p licit price paid for the water
component o f the transaction. U sin g hedonic
an aly sis to estimate the value o f water has
(he advantage o f being ba.sed on m arket
iraii.sactions rather than an a n aly st’s estimale.s o f c r o p yield,s, crop prices, /ixed co .sls,
and variable costs o f pioduelion.'
'I h c ii(iiliu t.s :in !. rc siiL -c iiv c ly , cuiiKiiasiiH w ith lU n ik m :iii-l;<lni(}M .s(oii h n u iiic c iin j;, iin tl |)rolcs.M )r, t^cpiirliiie iil i)[ A g r ic u ltu ra l und R e so u rc e C c o iio tiiic s , O reg on
•Stiilr U iiiv c r.s ily . T I il' iiiith o rs ii|in ic c i;u c Ih c li.ssi.Msiiicc
III W i lliiiiii ( j , It r iu v ii, R o n I ’ . M iilo ih n liliiic r . im tl tin
M in iiiyiiio iis rc v io w c i'.
' llc i lo i ii c iiiiiily.si.s liit.s the (lo .ssihic rlism lv iitiiiig c in
that it rcucal.i; m arket va lu e riu lic r than a g ric u ltu ra l pro-
fm o n u cs
Aiigusi i'jyy . 75 (3); 440-452
75(J)
I'iiii v m ill I 'f i i y- h iig iiliim W m rr Vnhtr
T'hiK piijjcr (.lcitu»iisli;i(cs iippliciilion d I I ic d o iiic p rice aiK ily sis lo sales o f in ig a le d land
in T V ca su ic V a lle y , O ic y u ii. T lie value ol' w a ­
ter ill in ig a lio ii as w ell as (h e v;iliie o I ' i i i I h ’]
uUi'ibiilcs co n n ccle d Ui llic laml is e siiiiialcd .
Proper eco iio in etric tcciinique is ciiiptiasi/ed
by slio w iiig lio w a iia ly iica l slio K c iils ean lead
to iiicn rreel co n clu sio n s. In paiticiilac, (a iliiie
lo account Tor lic lc io s k c tia slic ity when icstitig ruiictional ronn and d isca id in g c n a ia l
in ro iin n lio n by co lla p sin g soil capatu lily
c la sse s into a com posite land q u ality iiuicx
are slio w n lo lead to iiico ircct coiicJtisioiis.
II. TKLASUItlC V A U .K Y
W ater in T r c a s n ic V a lle y , localcd in
nortlica.slcrn M a llie u r C o u iiiy , G ie g o ii. is
used lo irrigate about I50.U0t) acre.s ori'arniiand. W ater in Ifiis area is af.so valuafile lo r
liyd ro p o w cr g ciieralio ii as il stands al 2.21)1)
leet elevation above sea level, iipsircatn oT I I
Iiy d m e te c liic tfanis on llic S n a k e and C o tn n ibiti R iv e rs. A tliird ilein aiid on die w alci sup­
ply ol T jc a s u r c V a lle y is die need I'oi' g rca icr
riv e r flow in (he S n a k e and C o lu m b ia R ivci.s
during (inic.s o f c ritica l .stdinoii m ig ialio ii.
T re a su re V a lle y surrounds Ilic low er
reaches o f the M a lh e u r and O w y h e e R iv e rs
and their c o n llu c n c c w ith the Snake R iv e r.
T h e citie s in the v a lle y in clu d e O iila rio , V ale,
and N y ssa . P iiiiia ry ca.sti cro jis arc onions,
potatoes, and sugar beets. I'rccip ila tio n a v e r­
ages eight inches per year. Pour iirig a iio n
disli k l s su p p ly w ater to about 9(1% o f die ir­
rigated land in die va lley . T iie balance o f ilic
irrigated land is supplied by o ilie r w aicr
sources, p rim a rily in d iv id u al rig lils lo pum p
directly from the river.
T h e four w ater d isli icts arc: O h I O w y h e e ,
O w yh e e H ilin e , V a le , and W arm.s))!ings.
E a c h provides an average annual d e live ry o f
app ro xim ately 3.5 acre-fcct per acre. O ld
O w y h e e has the ino.st se n io r rig lils, .so slnireliolders have a lw a y s received d icir full a llo t­
ment. T h e O w y lie c MiJinc opciaic.s O w yh ee
R e se rvo ir, w hich provide.s su riic ic n l c a rry ­
o ver to provide a full ulloiiiiciU in all Inil die
mo.sl .severe droughl. O w y h e e liilin c ha.s
never run out of w ater iluring the irrigation
sea.son, although in 1992 a projected short fall
cau.ved .sinfts in cropping paltcrn.s .snf/icicril
to jjc riiiii the liin iic il supply to last llirouglioiit die season. T h e V a le and Warnj.spring.s
d is liic ls holli reduced ilieii allotm ents in
llircc o f the last (en years, w ith im pacts more
.severe in llic V a le d islricl. 'I’h c ie i.s a p c ic c p lion that land vjilucs arc hrw cr in the w estern
I»ail o f the v alle y , w lierc the V a le and
W a n iisp riiig s d istricts are localeti, tliic to Ic.ss
reliable w aici' sujqilie.s. H ed o n ic p rice a n a ly ­
sis cn aliled an cx ain in aiio ii o f differciicc.s ri
value iis.sociatcd w itli each o f the differen
so u rces o f water.
III. O I IIIlK s i u ij j e s
H edonic jiric c iiiialy.si.s has been u.sed in
n iiiiiero iis se llin g s lo estim ate die value ol
d iffciciit a iiiib iite s contained in land assets;
,scc G ard n er and Dm row s (1 9 8 5 ), Palinq uist
and Dam'cl.son (1989). and X u . M itle lliain iner, and D arkley ( 199.1) for icecn t cxample.s.
G iv e n the popularity o f licd o nic p rice a n a ly ­
sis, it is surprising that few have u.scd lliis np[iroach lo value llic irrigiiiioii w ater coiiipoiieni. JIa ilm a ii and Anderson (1 9 6 2 ) used a
sim p le lin ear m odel to csiiiiin tc irrigation
water value provided by the C o lo ra d o -B ig
T lio m p so n ( C B T ) Project, a federal irrigation
project. T h e C B T Pro ject w as studied 25
years later by C ro u le r (1987) but this lim e
the B o x -C o x functional form w as used to lest
for scp a rah ifiiy hetw ecn m arkets for land and
fo r water. 'I'lic co n clu sio n w as that land and
water variables were not separable. T liis w as
a sigm'licaiit fiiufing because trading o f w ater,
on both a tem porary and a iicriiu iiicn l basis,
wa.s and is com m on under the C B T Project.
X u , M itlclh a m in cr, ami D a rk ley (1 9 9 3 )
estim ated a hedonic price fu n clioii tising agric iillu ia l hiiul sales in six geographic regions
covering ca.stem W asliiiigto ii, 'J'Jicy argued
that because observed land p rices are a lw a y s
po sitive, it is inappropriate to use a m odeled
error di.stiihulion tliat a llo w s the po.s.sibflily
o f a negative land price, T lic ir study used a
Iruneatcd (o g islie di.slribiilion and found the
tlu c lio ii v iiliic . T lic .ic Iw o v a lu e s w ill d iv e rg e in .sitaa(k )iis w lic ro llic iig iic iilliin il w iiic r is being so ld w illi un
c s |ie c liilio ii ol' UNO 1)1 h ig h e r pi ic cd )tiiin it i(t iil s u p p ly o r
iiin c iiily u.sc .s iirli us i i i i i i l ic .s iilc iili:il p ro p e rty . Iu (lie
s iiid y p rc sc n lc tl li c i c . w n lc r u.sc siiul vid u c is d o in iiiiilc d
h y ir iig iilio ii.
442
Ixiiiil I'lfitnnitiics
Iruiiculioii cITcct lo be signiJicjuil in (lircc t»l‘
Ific six regions. In iiiiotficr siiitly oi' Iniul
siilc.s, (Ills lim e I'oeiissiiig on (lie vnlno o f
gr:i7.ing lig lils , X n , M illcH in in m ci, iiiiil T'otcH
(19 9 4 ) rouniJ litiliiie l o neeoiml / o r i/ie Itiiii.
calio ii clTcct “ m ay liave lead lo .some ili.siortioii id th e fjaiamc/ei'esf/rnalc.s o/' key inleresl
lo llie p o l i c y i|U C S ( i o n .s atldres.scd ” in a . s l i t d y
by T o re ll and D o ll (1991).
A u g u s t 1VV9
A n im poilaiil di.siinclion id' this .study
Iroiii sume c a ilic r studies w as use o f each
land elas.s as a .scparalo variable ra llicr than
collii|ising that in foiin alio n into a single .soil
q iiiilily i i i J c x . O ilie r .stndic.s had ii.sed the predoiniiiani land cla.s.s or an a ica -w cig h lcd av­
erage o f the land clas.ses lo create a single
variable. Thi.s cau ses a lo.ss o f inroiniation
ihai was sliow n in (his study to be critica l.
T h e variabJc.s id ciili/icd were, in general;
IV. VA UU ULC IDENTHTCAT lUN
P ric e (jcr acre
V a ria b le s w ere id cn tilicil lo reine.scnl tlie
“ / ((’ la.ss I acres dividcil hy lolal acrc.s,
attributes o f ag rie u llu iai land in M alheur
C lass II a c re s dividerl by lo lal acres,
County. I ’he county a.ssc.ssoi‘.s o l'licc jjio vided m uch o f the data ictju iicd incUidiiig
(.'la.ss V ll acrc.s divitlcd by lolal acrc.s,
•sale price, acreage, so il c la ssiliciilio ii for
IJi.Maiicc lo town,
each acre, location o f property, dale ol sale,
Moiil/i o f sale,
nuitiber o f acres and source o f irrigation sup­
Niniibcr o f residences pcrniillcd divided
by lolal acres,
p ly, num ber o f residential lots perm itted, and
Assessed value of buildiiig.s divided by
eslim aled value o f buildings. T h is study in ­
total acres).
cluded all sales o f agricultural jn o p ci ly in
Treasu re V a tle y during (he years 1991
through 1995, exclu d ing sales among related
T'lic independent vnriabic.s w ere expressed on
persons w here the iian saetion price did not
a “ per a c r e " basis to be consistent w jlh the
rcllcet (he value o f Ihe property. T h e re w ere
d cpciiilcni variable. T h e n , bccairse Ihc .seven
a total u f 2 25 j)iopertie.s in llie .sample. M e ­
laiul cla.ss percentages add lo one, the in lcrdian size u f (lie propci tics w as 7S iic ic s, incccpi icrm w as dropped to avoid c o llin c a rily .
diaii p rice w as S J„394 jjc r acre.
Lan d C la sse s I through V are irrigated,
InronTiulioii at the county a.s.sessor's ofticc
I'ol low ing C l outer's lindiiig o f non.separabilindicated soil quality w as att im poilant iiiily between huid and w a lc i. ilic com rib illions
IIu ciicc on tlic productive cap acity and thus
t(j a.s.sct p rice from the land resource and
value o f the agricultural land. So il t|iialily infm m Ilic water resource were le p icsciilcd as
foriiiation w as obltiiiicd from soil surveys
inlci'actioii (ciiu s. That is, llie water w as not
conducted by the Natural R eso urce C o n se r­
scp a ialcd in the model IVoin Ihe land to
vation S e rv ice , T h e so il su rvey assigned a
w hicli il is appurtcnaiU by practice aiul by
land c la ss id en tilicr to all agricultural land
state law , I'or exam ple, Cla.s.s 1 acrctigc rcia c based on it.s cap ab ility to support crop
senis die interaction o f C la s s J so il and llic
growth. C la s s I is must cajiable, Cla.s.s V II
in igation water applied to iliiil .soil. T h e lirsl
least capable. Lan d in Gla.ss V I and V I I i.s not
liv e larnl classes in clin ic irrigation water.
iirigated. L a n d with C la s s 1 through V so ils,
Cla.ss V I and C h iss V I I do not.
if noii-irrigated, were rcealegorizcd by the
B ecau se Ihe irrigation .supply com es from
assesso r's office to be C la s s V I or V ll , T h is
d iric ic n l sources, the variables for Lan d
was done reco g n izin g tlial la ck o f rainfall i.s
Cia.s.se.s’ J ilirough V were di.saggregated to
a severe constraint on the pio d uctivity o f
I'cflcct liio five soiircc.s o f water. F o r cxntnnonirrigatcd so ils in (he region. T lie co n ­
plc, instead o f a single v a iiab le for Cla.s.s 111,
sum ptive w ater rcq u iic m ciil for pasluic grass
thcic were live variables, one corresponding
in T re asu re V a lle y averages 39 inches annu­
to each source o f water supp ly. T a b le I sum a lly , o n ly 4 inches o f w h ich are satislicd by
marize.s the land cla ss variables m odeled.
precipitation. ThLs. la ck o f precipitation
D isia iie c to town w as represented by both
cau.scs (he better q u ality so ils, if nonin igalecl,
:i tiircci linear Ic n n and a ic e ip io c a l term in
lo be no m ote productive than (u o n iirig alcd )
order to capture both liiicai- ami nonlinear cfC lu*» V I liiiid .
le cis. I h cie were a total o f six distance vari-
75(3)
443
/■'iiiiv tint/ f ’r n y : /rngiitirin Wtili'r Viiluc
l A lll.li
I .A M I . ( 'l / \ s \
\
I
M t lA IM I'N M l ( l ) i : i . | . | )
1.illlll ( 'h iss
W i i i i ' r .S iiiiiL 'c
II
Old OwylK t-
ttl. , 1
lll.h
O w y U c c lliljlli.'
Viik
W ;ir m K |> iit i; ;s
O l f l t T S lH lf V f S
lu ll
[lw
IIm
III
lllix .
I lliih
IIW
IIK v
lllo
IV
V
1V ( io
V ,„ ,
V u li
Vv
Vw
I V ii h
IV v
IV w
tV o
Vu
VI
V II
VI
V II
J
— sijtliilic.s nil i>h.vi-iriiliiiiiK, tin riu-i.-ililf
^ablcs: c jisliiiic c aiul lo cip u cal o f di.slaiiLc In
Iru iic a ic il e iro r Icrn i. M odel testing w as also
c a d ) o f (he (lu c e lo ca l (o w ns. Di.sUiiicc was
coudueletl lo e x a n iin c llic d il'fcre n cc in w ater
iiiic a s u ic d ill m ile s along roads s lu n vii lui
v alu e asso eialcd w ith the d iffe re n t so urces o f
county h ig h w a y d c p a ilin e n l iiuips.
w ater.
B e c a u se the li a n sa c lio iis sam ]iled oc
c u n e d o ve r a liv c - y c a r period, a v a ria lilc w as
fw ic lio ilt il T n n n
inclu d ed to ind icate n io iitli o f sa le . Iiiv e slig a liou o f re.siduals ind icated sp e ci(ica tio n o f
W h ile so n ic researchers continue to a s­
tim e as a lin e a r term wa.s adequate.
sum e a CunctionaJ fo rm fo r tlic ir hedonic
A l l o f llic p io p c U ic s .sliidicd ai’c zoned lin
equation. Palnu iui.sl (1 9 9 1 ) and o llic rs point
“ c x c lii.s iv c farm u .se ." 'r iiis legal d e sig n alio ii
out tlial econo m ic theory g e n e rally does not
p ro h ib its use o f the laud lo r n o u a g jie u lu u a l
p rovide guidance fo r .sp ccilicatio ii o f fu n c ­
purposes. S ig n itic a iit le g u la to ry lu iid lc.s niii.sl
tional form fo r land. A ssu m p iio n o f a fu n c ­
be o verco m e lo o b lain a jierm it Joe an a d d i­
tional fo n ii can lead lo in c o r r e c t c o n c lu s io n s
tional residence. T liis m akes an e x is lin g
and, th cie fo re, u.sing Ilic data to determ ine
“ iio n -c o n fo riiiin g use iic n u it ” fo r a r e s i­
the ap p ro p riaic fu nctio nal fo rm is rcco m dence quite valu a b le. T o rc d e c l (Ills value,
iiic n d c d . T h e D o x -C o x transfo rm atio n o f the
' the n um ber, i f a n y , o f ic .sid c iic cs p c n n iu c d
dependent vaiiu b le o n ly (lie ic in referred to as
on the prop erty w as inclu d ed as an e xp lan a­
the elas.sis U o x-C o x m o del) w as used in U iis
to ry v a ria b le .
study lo test fo r fu nctio nal fo rm . T h e B o x T h e liiia l exp lan ato ry vai'iable repi eseiUed
C o x tra n sfo in i is a.s follow ,s;
the asset v alu e o f b u ild in g s on the p ro p e iiy.
A n estim ate o f Ihi.s valu e w as jiro vid o d liy
the e o u iily a.sscssor’ s o ffice in d ie ir c.stiinaic
uli) =
k
It]
o f the rcp la ccm ciU valu e o f b u ild in g s on (he
1
1
1
y.
p ro p erly. Thi.s estim ate o f le p la c c iiic iil value
(w h ic li is iise ii fo r a.sse.ssments) w o u T iiece.ss a iily agree w ilh Ihe im jilie il m arke l value.
I f la m txiii is fo iiiu l lo be not s ig iiirie a n tly difA c o c flic ic n t g ic a te i’ llia ii one on ilii.s vairCereiit lhan one, (lien die m odel is jud ged lo
ab lc w ill iiid tcale m a ik c l vaJtie.s arc grc.'iler
he lin cn r. I f Jandida i.s- s ig n itic a n d y differen t
than assessed values and a co efficie n t less
from one, then the m odel i.s non lin ear.
lhan one w ill iiid ie a ie m arkel v alu e s arc less
C o in p lic a liiig m ailers, a B rcu scli-P ag a n
than asse.sscd v a lu e s.
lest o f the iintran.sform cd m odel ind icated tiie
presence o f lic lc ro s k c d a s tic erro rs. Z a re m b ka
V . M O D E L S F I'C IF IC A T IO N
(1 9 7 4 ) fouiKl the test o f lin e a rity using the
ela.ssie B o x - C o x m odel lo be biased in (be
M o d el testing to in su ie ap ]jro p riaic speeip icsen ce o f lie tc ro sk c d a stic ily . T liu .s, it wa.s
(ication dealt w ith the issues o f [’u iie lio iia l
n ecessary in llii.s .study lo p erfo rm a jo in t test
fo rm , Jic tc ro sk e d a stic ily , data co nstancy
ul' ruiiction al form and licte ro ske d a stie ily ,
across p o ssible m arket .segnicut.s, and a non
L a liir i and E g y (1 9 8 1 ) presented a B o x - C o x -
Uiiiif /scotiffniifW
i.skciliiNlic ( U C I I ) i i u k Ic I i I k i I iFiiildc.s
r: L>r rilll>jli(>ii:il In jiii in llic |))c.scii<jc n)'
i.sfccdjislicity. T lic ir m ctiuul iissum cs
|ilic :itiv c ticlu rn .ske d iislicily ic ln lc if in ;i
cd v a iiiib lc iiiid is npplicd in iltc clu ssic
?u \ m odel. T lie U C H m ndcl is iis lo l-
xp
•v»
/(O, o ’ /).
12J
unihda cocfliciciit iiidicaic.s a linear
on if lambda is cijual in one and a iioH'
cijualion il iiol equal (o one. IT lambda
: cue, the B C H model becomes a
led least squares model. The dclla coIII
indicalcs m ultij)lica(ive liclcrodicity lelulcd lo z if della does not
zero and no licleroskcdasticily of that
( della equals zero. I f delta equals zero,
J I l model sim plifies lo a classic Boxiiudcl. ir bolli Ininbda equals one and
t|uals zejo. the B C H model collapses
irdiiiiiry least squares model. Joiiii eslii of ihe unknowns— lambda, dclln, and
la coefficienls— is accomplished by a
id-eiror search over values for lambda
clla lu m axim ize (lie log-likcliliood
III.
lelect a varia b le z, related to llic helcrolic ity , the squared residu als from the
ly least squares m odel w ere regressed
c x p la iia lo ry variab les and (se p a ra lc ly )
c slim a lcci exp ectatio n o f the dcpendcnl
'e. T h e h lg lic s i /-value (4 .9 5 ) wa.s tum id
expected value o f the dependent vari>'). F o r tills reason, y w as chosen lo
:nt z in the B C H m odel. I l is reasonable
i999
lo find ihc vai iiiliility in pi icc-pci aero iiicica.scs w ith price per iic ic , IVInic cxficn .sivc
land lia.s a g ie a lc i m im ticr and a g ie a lc r vai ic ly nt aUii(ni(e.s (cadiiqi (n g rc a lc r variance
in pi ice pci' acre. T h e |ji occdin e wa.s lo gcncra lc y lin in the chcs.sic IJo x -C n x m nd cl, then
u.sc dial V I'oi ; in llic B C H model.
T he grid search across values n f X and 5
rouriil Ihc iiia x iiiiu in value fo r the lo g -lik e lihood lu n c lio ii o f the B C H m odel to be
- 1 2 7 .5 .6 3 , w here A = 1 , 0 2 and 6 - 1.48,
Hypnthc.scs w ere llien tested by placing reslric lin ris on Ihe I J C l l model as show n in T a ­
ble 2 . A re s lric lio ii lhal lam bda ctpiaJs one
coll vei ls llic B C H m odel to a w eig litcd least
squares ( W L S ) m odel. A like lih o o d ratio test
o f the liy p o lh c sis that lam bda equids one has
a like lih o o d ratio ( L R ) ol 0 .0 6 , far less than
the 5 % c ritic a l valu e o f 3 .8 4 . T liu s , llie h y ­
pothesis caim ut be rejected and lin e a rity is
iiid ictiled .
A ic.sirictio n llia t delta equals zero ignores
the presence o f h e le ro skcd a slicity and results
ill a cla.ssic B o x - C o x ( B C ) m odel. T h e liy po lhcsis that delta equals zero has a lik c liliood la iio o f 4 7 .7 6 , ic s u lliiig in rejection o f
that liy(M)(hesi.s. I f (he B o x - C o x test fo r fu nc­
tional form laid been co iu lu clcd w iilio itl co n­
sideration fo r lie tc ro sk e d a slic ity , the inc o rrc c l co nclusio n o f a n o n lin e ar hedonic
equal inn w ould have been draw n. T h e m a x i­
m um In g -like lih o o d as.socitiied w ith o rd in ary
Icasi .squares ( O L S ) i.s sliovvii in T a b le 2 for
c o in p lc lc iie ss.
M a rk et Segntenuuion
T lie .sample co llected fo r this slu d y iiiclu d crl a ll sale s o f ag ricu ltu ral land in T re a ­
sure V a lle y in the p revio us liv e ye a rs. T h is
included large parcels and sm all j/arcels, ir iigalcd land and n o u -in ig a lcd land, hind w ilh -
TA BLE 2
J o i n t T k s i in o o r llariu io .sK im A .srK Ti v
Model
UCll
W LS.
BC
OLS
X
__
\ =
1.0 2
1.0
5 = 0 .0
X = 1.0, 5 = 0.0
1.0 0
0.67
1.0 0
a n d
I ' u n c t i o n a l Fo rm
S
Miixiinuili L I.
1.4K
1.49
0 .0 ( 1
0 .0 1 )
-127.S.6J
-I27.S.6&
-1299.51
-1.117.72
LK
0
0 .0 0
47.70
84. IR
75(3)
I 'uux iUh! P v n y : In iya iiim W m er Viiliir
out buildiiig.s iind liiiu l w lic iu ilic viilu c o JT lic
.siiiiipic, T o pcrl'o nii (lie C lio w jrrc d ic tiv e lest,
b u ild in g s c o /jip ;is c d m u st u l‘ llie sale p rice. 1 1
a separate obsei va lio iu il d u m m y is assigned
w as co n c e iv a b le lhat (he n ia ik c l in T re a su re
lo eacli ol' (he o bscrvatioii.s susp ccled o f not
V a lle y fo r a g ric u liu ra l land n tig lil be scgbelonging. T lie n u ll hyp o thesis is that a ll o f
n ic iilc d into separate inai kct.s fo r one reason
tlic o b scrvalio iu il d u m m y v a ria b le c o e ffi­
o r anodiei . F o r exa n ip Je , (fie n ia rk c l fo r taiuf
cien ts are equal lo zero.
fo r ca sli crops co u ld be tIilTorcm Croiti (he
F iv e situatio ns w ere studied fo r po ssible
(iia ik c t fo r land fo r forage crop s in a la n c liin g
m a rk c l .vegnieniation. T h e y w ere, total p ric e ,
b p e ia lio ii w liie Ji co uld be d ilfe re iK fro n i llie
value o f b u ild in g s, percent o f p rice in b u ild ­
Inu rkct fo r " lio is c p ro p e rly ’ ' allaclio d (o a
ings, total aci'c.s greater than 4 0 0 , and total
rural residence. E a c h o f (lie.se in aikcc scgacres greater than 4 0 . T lie dem arcation bemeiUs co uld lia v e a di.siinei (lem aiid or sup­
(w ccn possible .scgmeni.s was selected by
p ly fu iic iio n w ith co ric.sp o iu lin g d id c rc in
lo o k in g fo r b reaks in the data on plots illu s e q u ilib riu m price.s.
ira lin g (lie range o f o bservatio ns o f an attriIn o rd er (o aseerdiiii w lie ilie r a ll tian sacbule. F o r e xa m p le . F ig u re 1 sho w s the p rice
tio iis in llic sam ple eam c from the .same m ar­
paid fo r each o f the 2 2 5 properties. T h e 13
ket, (lie sam ple w as sorted lo id e n tify fnopcrproperties costing m ore than $ 3 1 0 ,0 0 0 w ere
ties that m ay belong to a s e p a ia lc m arkcl and
suspected o f belonging to :i separate m arket
tests w ere conducted to sec i f (lio se p rop er­
(fom w h ic h tlic m a jo rity o f p a rtic ip a iils w ere
ties ‘ ‘ fit” w ith tlic m n jo rily o f the piopei tic.s.
e xclu d ed by Ihc in a b ility to control large
A C h o w p re d ic tiv e fc.st (C lio w 1 9 0 0 ) w a s
aiiiouni.s o f c a jiliu l.
conducted on e iic li .sort lo .see if the .sale price
T a b le 3 su n im iirizc.s llic Ic.sts o f m arket
fo r die n iid o rily portion o f the sam p le fell
segm entation. Tw o tests w ere fo riiiu lu lc d to
w itliin the [irc d ic lio ii in le i val o f the regie.sexam in e (he iio .ssib ility o f a d istin ct m arket
sion p crfo n tie d on the iita jo i i iy por tion o f tlic
a.ssociated w illi purchase o f an ag ricu ltu ral
number of sa le s equal to or exceed in g
I' l C l U K P I
Disrutnu j'ioN oi- Oiisnu va i ions o n T o i a l I’ uitru
446
L a n d E c o n o m ic s
August 1999
TABLE 3
C (fow pRriDicnvfc- T e s t s o r MAiiKt-.r S e g m e n t a t u w
Cliiirjicicri.siic
Total price
Value of fiuildiiigs
Percent building value
Nonirrigjilcd ocrciigc
Nonirrigalcd acreage
Deinarcation
between suIjscIn
$3K).0(K)
$80,000
53%
400 acres
40 acres
property pritiiarily for rc.sitlcinitij ii.sc.
T w en ty y f llie sales included buildings val­
ued greater than $ 8 0 ,0 0 0 . Fourteen o f the
sa les had*greater than 5 3 % o f their total sale
price in buildings. T w o additional test w c ic
conducted to in vestigate (he jrossiliility o f
scgn ieiitalion a ssociated with use o f land in
ranching as op p osed to fanning. T’liirtecn o f
the sajes in volved m ore than 4 0 0 nonirrigaled acres; 5 6 o f (lie sa les in volved more
tJiaii 4 0 nonii rigatcd acres. N o n e o f (fie C how
predictive tests led lo rejection o f the null h y­
p othesis, indicating (hat sales witli extrem e­
valued altribules all fell within the p ieilietion
interval o f the cliaraclerislic market. N o mar­
ket segm entation for agricuftuial hind was
found to exist in Treasure V alley.
N u n -T r u n c a te d E r r o r D is tr ib u tio n
X u , M iuelham m er, and B arkley (1 9 9 3 ) ar­
g u ed that a truncated error distribution
sh ou ld be used w hen estim ating hedonic
m od els o f land values. F o llo w in g tlieir ap­
proach, a truncated lo g istic distribution was
used to m odel n on n egative land values. The
m od el is o f the form
w here Y is land price per acre, jtj{X, (i) is the
original hedonic land value m odel, and lau is
the scale param eter. T his rormululiun sub­
su m es the untruncaled m od el as the special
c a se w h en tau ajjpraaches zero. C on se­
quently, a signi/icaiK /-statistic for (au indi­
cates tau is not zero and the truncated m odel
is needed. The estim ated coeflicieiU for tau
w as sm all (5 3 .4 ) atid d ecid ed ly iiisigiiilicant
(1 ~ 0.40), leading to the conclusion that the
A-,sIati.stic
A value
1.44
t.06
0.14
0.40
0.46
0.90
1.23
0.55
0.26
o.yy
iruncaled error m od el wji.s not needed for this
analysis.
o f VV(i/cr S o u r c e
li'j'igiitcd land in Trca.sure V alley is served
by tine o f four different water districts or by
other ind ivid u ally-ow n ed water sources. The
dislricls liold water rights that d iffer in sen io iity . T h ey also ow n and operate differing
anmtiiits o f reservoir storage. 7'hesc factors
affect the am ount o f w ater delivered in dry
years w hich w as hypothesized lo result in
tlid cu 'n t pricc.s for in ig iiled land o f sim ilar
soil cajiabilily. It w as exp ected that price
w ould differ according to source o f water
sujiply, that O ld O w yh ee and O w yh ee Milinc
d isliic ts w ou id be m ore e x p e n siv e than
Warm.springs and V ale districts, and that
V ale w ould be the Ica.st exjien sive district.
This expectation , based on k n ow led ge o f the
w ater supply, w as bolstered by local percep­
tion
lliat land
under the V a le and
W arm spiings districts sold for le ss than land
under tlie O ld O w y h ee and O w yh ee H iline
di.Mircls. T lic safes data c o llected in Ihi.s
study conlirm ed that, from 1991 through
1995, (lie average price-pcr-acrc for farm s
sold under the V ale district w as on ly h a lf o f
(he pi icc-pcr-acre for farm s sold under (he
Old O w y h ee district.
To evaluate the d ifferen ce betw een water
tiislrict.s, a lest w as run on the Iiypollic.sis that
the co cf/icien ts on land variables o f a g iven
soil cla.ss w ere equal acro.ss all sources o f
water supply. Surprisingly, the null hypothe­
sis could not be rejected. T h e F -slatistic for
thi.s lest w as 1.50, corresponding to a p -v a lu e
(i.e., ])i()bal)ility o f T yp e I error) o fO . IJ and
com pared lo a 5% criiicul value o f 1.72,
7 5 (3 )
t'iiiix a m ) I ’c rry : h rigtitifin W ater Value
Oilier Icsl.s were coiulitckil Ui exam ine (lie
dilTcrence in price assoeialed with sou iee n(
wnlei. 'ITicso addilional tests were: 1) all (mir
di.sliicts were eiiinil hiii dilTcreiii ihan
“ Otiici ” walcr .sourecs; 2) Old Q wytice and
O wyftcc H iliiic were ctpiaJ, Waniispi irtg.s
and Vale were equal but (lie Iwo grtiups tlilfeiciit llian cacli oilier; and 3) Old O wyhee.
O w yhee Milinc, and Waim.spriiig.s were
equal bn( different than (he Vale di.sdict. In
all ca.se.s, llic icsls o f signilicancc indicaicd
no djffcrciiee in land value atlribnlablc lo
water .souice.
,
The mo.st likely exphination for ihi.s lack
o f signihcance dci ivc.s lioin (lieciiip prodiic
’ lion and rotation pallcm.s pi acticed by fann­
ers in Ihc valley. Mo.sl o f ilie incom e (o farms
in Treasure V alley com es Ii oni onion and po­
tato production. I low evcr, beeau.sc o f tiiscjise
probIcm.s, ihc.sc crop.s can be grown only
once c v c iy Iliice-to-live ycais on a given
held. Olhcr ciop s, parlieufarTy wfieal aiul
bay, arc used in lolalitni to m inim i/x disea.se
probleni.s and to cnlianee die piodueliviiy of
the soil for later plantings o f onions and [lolaloes. WJieal ami hay, Jiowever, liavc rela­
tively sm all profit margins. When water i.s in
.short supply. Ihe.se low pmlit crop.s aic eilliei
deficit-inigalcd or not planlcd al all in order
to conserve water for (lie other fields with
' cash crops. Consequently, a shortage o f w a­
ter supply m ainly affects pioduelion o f low-
valued crops, icsiilling in ichiliveiy lillle impticl on rcliini.s lo land in TVetisure Valley.
TTie liiel llial fainis under Ihc Vale and
Warmsprings tiislriets .sell for le.ss per acre
can insteail lie ex|)laincil hy tlie prcdominaiiec o f lower ijtialiiy .soils in those districts.
VI. JU iSU L J’S
Bccan.sc Ihe .source o f water did not prove
to be a sigiiifietinl etiu.se o f difference in land
values, (be land variabic.s were aggregated
acro.ss water source. Three o f the distance
variabic.s were dropped from Ihe equation be­
cau.sc they liad /-values Ic.ss Ihan one. Drop­
ping llic variables reduces the mean square
error o f csliiiialioM (Kao 1971). The resulting
hedonic model is sliown in Table 4. There are
a lolal o f 13 cx|ihiiialoiy variables, 12 o f
which are significant at the 5% level and 11
o f which Jire signilicanl at the 1% level. The
percent o f v.iriiilion explained i.s 92%.
Tiic cocflicicnl on permiKcd residences is
o f special inlerc.st bccaiJ.sc (here may be no
other way lo estimate tlic market value o f (his
asset. The value o f a non-conform ing use
permit for a residence on agriculturallyzoned land in Treasure Valfey was estimated
to be about $6,200. This is far greater than
Ihe value assigned to Ihe.sc half-acre lots by
llie county a.s.scs.sor’.s office.
The coeiTicienl on the asscs.scd value o f
TA M LB
Meoonic M oon, rou Aoincoi
V iir h b lc
Liinil Clii.w 1
Liiiid Clii.>!.<: II
Liirid CI11S.S Ml
Land Class IV
Land Clas.s V
Lmid Clas.s VI
Land Cla.s.s VII
Muilding value
Pcniiiltcd rusidetiLe.s
Monlli.s siiiec June 1993
Mtle.s lo Onlnrio
Reciprocal of niile.s lo Onlario
Reciprocal of miles lo Vale
tValcs:
Ft' = 0.92
flelero-skeilaslic weigliling: in =
ic u a i
Cod (it iciil
(■.sliiiMli2,9 IS
2.KKI
I.I.S‘1
KSI
.to/
J IS
1.17
6.2US
3 .7 7
-.S. U,
27H
-
in r
4
Lano Sai.e.s in Tur.ASURn, Vm.i.ey
SUiiiiliird
bn til
7-staiislic
filW
l.ld
90
7f.
y«
d.S
13.7
16.6
12.6
9.0
6.2
').<(
I.AS
2.32
4,7
- 2 .7 0
2.99
- 1..52
56
0.076
2,672
O.HO
1.99
93
69
/ ’-value
<0.(K)|
<0.001
<0.t«M
<0.(K)l
<0.(H)l
<0.001
CO.IHII
<0.(NH
0.02 f
<0,(H)l
0.007
0.(H)3
0.1 31
448
Diiul Efiiiiiiiiiii
buildings w as estinialed at 1.17, iiidiciiliiig
die market value on building.s w;w 17%
greater duin the assessed value. This may icfleet a tendency o f assessors lo underestimate
building value in order to avoid eontc.sled ap­
praisals.
T im e appreciation was estimated al $3.77
per acre per mondi. 71iis woi k.s tun lo an an­
nual rale b f 3.2% at die iiicdlan larm price.
B y comparison, the national C F l increased
by. an annual rate of 3 .5 % during flic same
time period. A graph o f the residual.s versus
die lim e variable sliowed a fairly uniform
.scatter o f po.sitive and negative residuals.
T h is suggests specilicaiioii of (he lime vari­
able as a linear icrm was an ailcciualc rcprcsentalioii.
.
Both the linear and recijirocal vaiiables
fo r distance to Ontario were .s/giii/icanl. In
concert, tliese variables indicate land value
drops o ff rajiidly in a nonlinear fasliion a.s
distance lo Ontario grows, unlil al aboui live
m iles distance the rale of decline in hind
value evens out to an apjjroximuic liiieai' rale
o f about $0 per iierc less value for cacli addi­
tional m ile lo Ontario. T h e eoel'licicm on ic-
Aiigu.vf /p v p
c ip io c a l o f di.slance lo V a le w as o f unexpceieil .sign but in s ig iiilic a iit w ith a />-value
ol 13%. l i w as nut drop|ied from the equation
because its /-value w as greater than one.
T lic c o c fltc ic n ls on land classe s arc best
in ie ip re lcd w here one o f llic classe s has a
value o f one and a il o ilie r classe s are zero.
H olding a ll other exp lan atory v a iia b le s con■sianl. die d ifferen ce between land class coeflic ie n ls indicates the value attributable to so il
q u a lily and the presence o r absence o f irrig a ­
tion sup ply. F ig u re 2 illu strate s the m arket
value |ic r acre fo r the seven land classe s in
T rc a s iric V a lle y e x c lu s iv e o f an y co n lrib u tion.s (o value from (he other e xp lan ato ry
v aiiab ic.s. Note that the jn ic c o f land is
s liu iig ly innuenced by ihe ca p a b ility o f die
.soil lo grow crop.s. N o tice also d ial llie progie.s.sioii in value between land c la ss categorie.s i.s neither lin e ar nor fo llo w s a snio o lh
c u rv e .
W iii i'i
V iiliie
U c c a ll tlial La n d Cla.s.se.s 1 llirough V arc
iri igalcd and Cla.ssc.s V I and V I I are not. B e-
$3,000
$2,500
g $2,000
CTJ
g . $1,500
(U
o
E . $1,000
$500 —
$0
i -
la n d c l a s s
fT G U K li 2
ia) L a n o I’kk
H s i iM M
cs
75(3)
I 'd lf X u n i t I ' v r r y : / n i g n l i n i i W a i r r V n /i i r
I A llM i 5
V a i.u r . o r
lir r iK jA ir o N
W A iiin
in
'I'niiAXDKi;
V a i .i i ; y ( i n
i m h .i m i x
)
l.irtrtJ t ’ l:rri..l
1.
V i i l i i c i>r iiT if !;iii.J Ijiriil i j t r a c re
2.
V id u e (ifi
liiiicl |n :r ai-n;
3.
4.
5.
V i i l i i c ( if w iK i r |»iT a<.tc
A n m ir il viiliA - nl' w irie r |ie r ar.ro"
V a liio !>(■ vvaror ['o r iiofo-rirni''
V
IV
III
II
HHt
1 07
.514
.11
t'17
962
.107
.5U.5
.10
170
1 ,4 8 9
.107
I.I2 2
07
2 ,1 0 0
-121
495
729
19
.10
44
.107
1.74.1
lu .s
1
2 .9 1 8
307
2,5.51
1.53
( J d i v o r c d |K 'ri-iin i;rl|y )
6.
V irliic ( j T wrrK-r per rroic rtiul*''
(d e liv e re d iirro litiic )
V
in
' hir.wcl on a 0 % <ii.so<uini rare rrrnl inliirrrr jjjpn- Jiniij'on
* based on an average atrrruni w arrr ilc liv c iy of .1 5 n irc-fc o l jic f . iii c
ca u se T re a su re V alley receiv es so little ju ccip ita liu n , land w ith o u t im g a lio ii w ater p ro ­
v id e s sc a n t p ro d u c tiv ily reg a rd le ss o f its
fertility . Decau.se o f thi.s, ilie value e.siiinaied
fo r Cla.s.s V I land pio v iilo s ti g otal c.stiinale
o f the value o f Chi.s.s I (hrougli V liriui
strip p e d o f ii.s w ater. T h e value o f w aie r a p ­
p lie d to each o f llic live irrigated latid elas.sc.s
can th e re fo re be d c te m tiiie d by su b lia c lin g
the value o f d ry lan d , llial is, tlic value o f
C liiss VI land, lio n i llie value o f land w ith
w ater. T a b le 5 sliow.s ihi.s calcu lalio ji. Row 1
is the v alu e o f land (in cliid in g w atci j a.s tleIcrm ined by h ed o n ic aiialy.sis. R ow 2 i.s tlre
v ak ie o f d ry lan d a.s c.slimrrled for Cla.s.s VI
land. R o w 3 is tlie d iffe re n c e o r the an ip u n i
alli'ibulablc lo irrig atio n supjily. R ow .3
sh o w s th e v alu e o f irrig atio n w jiier to iiitige
fro m $ 5 1 4 p e r ac re o f Cla.ss V land to $2,551
p e r a c re o f C lass I land.
T h e v alu e o f w ate r is expies.scd in a total
o f fo u r d iffe re n t u n its in I ’uble 5. R o w 3
sliow s th e v alu e o f a p eren n ial w ater su p p ly
fo r o n e acre. R o w 4 show.s the vtiluc for one
y e a r o f w a te r su p p ly fo r one acre, btiscd on
an a.ssum ed 6% dbscounl factor. R ow 5 p ro ­
vides th e value p e r ac rc-fo o t o f a p eren n ial
w ate r su p p ly and ro w C .shows the valu e jiei
acre-foot. T h e m arginal value o f irrig atio n
w ater in T ic a siiic V alley is sh o w n to be ,$0
p e r aerc-l'ool.
T h e p ro c e d u re show n in T ab le 5 alii ibiiles
(he in c re asin g value o f iiiglicr (jualily in igated lands so lely to the w ater supply. M ore
accu rately , th e in creased value o f the higher
qu ality lands d eriv es froni an iiilcractio n o f
the w ater reso u rce and th e so il reso u rce. T o
the ex ten t w ate r ca n n o t be m o v ed from one
p ie ce o f land to an o th er, it w o u ld be a p p ro ­
p riate to attrib u te the increa.scd v alu e lo the
w ate r rcsoui co. O n Ihc o th e r h an d , to th e e x ­
tent w ate r c:in b e freely tran sfe rred to any
lan d u n d er th e d istrict, the value o f w ate r
w o u ld be the value g en e rate d on Ihe le ast c a ­
p ab le land iirig a icd , dial is, o n C lass V land.
In (his se co n d view , the value o f w ate r on all
lands is Ihc m arg in al value o f $5 14 p er acre
(on C lass V lands). V alue in ex c ess o f $ 5 1 4
p e r acre on C lass I th ro u g h IV lau d s w o u ld
be attrib u ted to the .soil reso u rce.
M ix h littg S a il Q uality a s a S in g le Variable
A s m cn iio u cd ea rlier, r ig u ic 2 sh o w s th at
th e value o f land d o cs not fo llo w a lin e a r progrcKsitiM from on e land class ca te g o ry lo the
next. P rev io u s siiulic.s inatlc th e im p licit a.ssu m p tio n o f a lin e a r p ro g re ssio tt in value
from on e land chtss lo th e n ex t w hen the
sev en land classes w ere av erag ed in to a sin ­
g le co in p o sitc index. T h is is a io.s.s o f in fo r­
m atio n that w as sim w n in th is stu d y lo h av e
a stro n g in lh icn cc on d eterm in in g the valu e
o f agriciiliurtif projici ty.
T o stu d y th e sig n ilic an ce o f this loss o f inrorm aliun, the h ed o n ic cc|u:ilion w as re c a l­
c u la te d w ith a co iiip o silc lan d q u ality index
ill jilace o f the .seven .separate lan d cla ss variablc.s. T h e co m p o site index w as cre ate d a.s
the arc a-w cig lu cd avcrtigc land class on (he
p iojierty, that is, llie p erc en t o f the p ro p erty
in L and C lass 1, lim es o n e; p lu s th e p e rc e n t
450
Ijuu! lii'Diuiiitir.
August 1999
I’AIJI.I! (,
|[t;in»NK:
w i i ii CoMi'dSi 11-;
VurinNc
C d i 'l 'l i e i r a l
L iir iil i|iiiilit y in d e x
- I2'l..|
a.iHu
llitildilig Viilui!
I’cttiiillcd I'csidcticcs
Monllis
Disliificc U) OiKario
ftcciprocal of dislancc lii Odlaiio
ftcciproca! of di:;iiiiicc Ui Vale
Coiislaiit
Nutes: \
= 0 .8 6 , 6 =
[.3'1,
ANij Q u A i.r r v I n i U'X
S u in d a i d H i lo r
/ '- s ia li s li c
0.025
V61
0,41
I.I
-LS
.10
40
-1 y.7
15.5
2.44
5.5
-2.04
2.94
-1.97
24.8
2.24
-2.25
10.1
-fill
9'M
= (l.S.l
o f llie p/op'ciiy in Lan d CIu.ss II. linio.s Iwo;
et cetera iluougli L a n d C /ass V ( L iJecan.sc
lliere no longer were indepeiideni variables
iJjat added lo one, a c o n slaiil lei tn w as leiiitroduccd lo iJjc rcgic.v.vion. T h e U o x - C o x - h c tero sked aslic m odel wa.s Uien reapplied to the
n ew ly id cm ilied variables. O n ce again, the
model w as found to he helcro.skedaslic hut
liie equation w as non-lincai (A. = 0 .8 6 ) l ailiei
tliufi linear. I'liis wa.s not suipii.siiig siiie c the
- progression o f jn ic e s I'rom Lan d Cla.ss I to
Lan d Cla.ss V II wa.s .sliown in I'igtire 2 lo he
not linear, 'the hedonic model w ilh a conip o sile land quality index is slio w ii in 'fab le 6.
T h e e sliiiialed value for eacfi land cia.ss
was cojiipared between the original n iu d d
w itli s e v e n ,separate land clas.s variables and
llie second m odel with one co n ip o sile v ari­
able for land quality. B u ild in g s, (iciiiiiltcd
residen ces, and time variables are all set to
zero. D ista n ce to O n la iio w as set at 7,2 m iles
because, at this distance, the eoiilribution lo
properly value from die two distance v ari­
ables for O ntario in tlie original model arc o f
ctpial but oppo.sitc m agniuide, A distance o f
six m iles to V a le was u.sed to com pJele the
co m p aiisu ii. T a b le 7 .sliows tlie estim ated
land piiec.s using the two m odels. Figu re 3
dIo.Mraie.s liow the com posite index model
forces die land prices ink) a sinoodi cu rve.
Iliougli .soil cap ab ility cla.ss lunnbcr.s were
never iiiicndcd to represent a eontiiiuous
liiiiction.
T h e aeeu ia cy o f e.siim alion lost by use o f
Ihc sing le index varialde lo r soil rjiiality
causes addilioiuil prohlcni.s in the next slcji
of Ih c a n a ly s is . 'I'lic e siiiiiiilcd value o l'w ater
from llic two iiiu d cis i.s .shown in T a b le 8.
ih c m arginal value o f irrigation water, that
is, llic value o f water ou the poorest land irrigaietl, was 4 0 % less using the m odel coii(aining o n ly (he single, com posite variable
for .soil quality than it wu.s using the model
witli .sejiarate so il cla ss variables, Jgiiotiiig
vilaJ inl'orinalion on so il capabiJily by collaji.siiig the available inform ation into a c o m ­
posite land quality index causes a vastly difi'crcni estim ate o f llie asset value in question.
TA BLE 7
C O M I-A R IS O N o r L a n d V a l u e C s r i M M i L s U s i n u S e p a r a t e L a n d C l a s s
V a r i a b l e s V e r .s u s a C o m p q .s i t e L a n d Q u a l i t y
Land CJa.is
VII
VI
V
IV
III
11
I
Sc/ninilc Lu iid
Class Variiil'lcs
211
150
HM
945
1.472
2,081
2.901
V a r ia b l e ($ / a c r e )
CffnipiMifc Land
LJiialiiy Viuiiihlc
204
4«4
791
1, 1 1f.
I,4.'i4
i
:,iu 5
% Di.scrcpaiicy
-13%
+ 18%
-H%
H-18%
-1 %
-IJ%
- 25%
Faux a n d Ferry: I n i gat ion Water Value
75(JJ
451
$ 3 ,0 0 0
$ 2 ,5 0 0
OJ $2,000
o
(0
£ $ 1 ,5 0 0
0)
o
^ $ 1,000
$500
$0
V II
VI
V
IV
II
III
land class
separate land classes
-B - composite land class index
F IG U R E 3
C o m p a r i s o n o r F s tiM A T E D L a n d P r i c e s
TA BLE 8
C
o m p a r is o n
C
lass
Land Class
V
IV
III
II
I
V
of
E s t im
a i f, r
V
alu e
U
s in g
S
eparate
C o m p o s it e L a n d Q u a l i t y V
( $ / a c r e - f o o t , D iu i v e r e d P e r e n n i a l l y )
a r ia d l e s
V
W
ated
ersus
a
Separate Land
Class Variables
Composite Land
Quality Vnriahtc
147
170
321
495
729
88
181
277
377
480
L
and
a r ia b l e
%
Discrepancy
-40%
+fi%
-14%
-24%
-34%
452
Ltiiiil Eciimiiiiicx
V lf. SUMMAKV AND CONCLUSION
August 1999
Valuing W alci R ig lils .” T h e A p p r a is a l Jo u r„ a l 5 7 : (8 0 -9 6 .
T liis study applied hedunic iirice an aly sis
LO a g ric u llu ia l land sides in 'r ic iis in c V a lle y .
O reg on , in order (o esiiiiiatc Ilio value ol' w a­
ter in irrigation. TJie iiiipiieit jii iec o f watci',
o f iaiid , and o f other coiiiponeiU.s o f [lie prop­
erty rc,souice w eie tcvcalcd. 'Che iiia ig in al
value o f water fo r irrig aliu ii in T rc a s u ic V a l­
le y w as estiiiialcd to be $ 9 per acre-fool. T h e
value o f a “ iio n-coiifonnjng use p e im it” for
a residential lot on land zoned for a g r i c u l ­
tural use ill T reasu re V a lle y w as estimated to
be $6,200 . N o evid en ce o f m arkcl .scgnienlijtion w as fduiid in agricultural land .sales in
T reasu re V p lley .
T h e value o f irrigation su p p ly in T ica .su ic
V a lle y w as sho w n to be consislent ine.spoetive o f the differing water rights and water
storage facilitie s o f the district pro vid ing the
water. O b served d iffe ie iic cs in stiJes prices
between tlie districl.s w as iiistctid attributed lo
differences in qu ality o f so ils found in the
districts.
T h e soil cap ab ility cla ss was show n to
h ave a stro n g iiin u e n c e on ag ricultural Jtiiiil
p rice . T h e im portance o f u liJiziiig aJi a v a il­
able infonnation on land quality w as dcm on.stiuted. D iscard in g so n ic o f (bat in fonnalion
by co llap sin g the so il cap ab ility cla.ss inforinatioii into a com posite index w as sliow n lo
cause a 4 0 % cliaiig c in the paniniclei' o f in­
terest.
T h e in ip o ila n cc o f acco uiiliiig for licterosk ed a sticity when testing fo r fuiictioiuil lo n ii
w as dem onstrated by slio w in g that failu re lo
conduct a jo in t lest for lieteio sked asticiiy and
functional form w ould lead in tliis case to an
incorrect rejection o f a lin ear m odel.
.
Kcfercnccs
C tio w , G . C , (9 6 0 . “ Tests o f E q u ality Between
Subscis o f C o c flic ic iils in T w o Lin e a r Hcgic.ssioii (Viodds.” L c m to u tc tn e u 28: 5 9 1 -6 0 5 .
C o lb y , B . G . 1989, ''A llc n u iliv c Approadic.s to
C n n d c i. J. 1*. 1987. ''Ilc ilo iiic ristiinatioii Applied
1(1 ,1 Water Riglil.s fvlaiket.”
L n m l iLco iin in ies
6.1 (A u g .): 2 5 9 -7 1 .
Ciantiier, K ., and R . Utirrow.s. 1985. " T lic Inijiiict
o f So il C o iisciv alio ii liivcslinciil.s on Land
I’ lic c s .” Aiiieric(i/i J o u rn a l o f A g ricu ltu ra l
Ti itiniinics 67; 94.1—47.
Matfiiian, L . M ., and K . L . Andej-son. 1962. “ E slimafirig flic V ;ila c o f fnigation W ater From
I'a iiii Sales Data in Noitlieu.stcni Colorado.”
■/ooniii! o f F o n ii H conoinics AA: 2 0 7 -1 3 .
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and I'c.Kting for Fu iiclio iial Fo rn i iitul Hclero.skeda.slidly.” J o u rn o ! o f E c o n o m e tric s 15:
2 9 9-307.
PaIi)U|ui.sl, R . B . 1991. “ liedonie M clbods.” In
M ea su rin g th e D eiiioiitl f o r E iiviroioiiciiial
{Jiiiih ty . cd. J , B . iJiad cii and C . D . KoJ-slad,
Ll.'(evici Science Publi.sliers.
Palnuiui.sl, R , B-. and L . L . DanieI.son, 1989, “ A
Hedonic S liid y o f llic E l fcct.s o f Erosion Coiili ol and Drainage on Fin inland Value.s,”
American Jo a n ia l o f Agricultural Ecoftomics
71: 5 5 -6 2 .
R ao , I'. 1971. “ Some Notes on M isspecificaiion
ill M ultiple R cerc.ssioiis.” T h e A m e ric a n S ta t­
istic ia n 25 (5 ): 3 7 -3 9 .
T o ic ll, L . A ., and J . P. Do/1. I 9 9 i. " P u b lic Land
P olicy and Itic Value o f G razing P c in iil.s ."
W e sirn i J a a rn a t o fA g r ic iilltir a i Isconom ics 10
(0 : 174-84,
Young, R . A . 1978. ” Econuniic Analy.si.s and
I'Cdcraf h itg aliu ll f^>/icy: A R cap jiiai.sal.”
W't'Mrrn J o u r n a l i/f A g r ic u lt u r a l E c o n o m ic s 3
(2 ): 2.S7-67.
7(u. I'., R . C . M iltcllia in in e i, and P. W . B arkle y.
1993. “ Mca.suiing die C ontribiitioiis o f S ilc
C lu n acicristics lo tlic Value o f Agficu/turai
L a iitl.” L a n d E c o n o m ics 69 (D e c .): 3 5 6 -6 9 .
X u . P ., R . C . M itld b an in ier, and L . A . T o re ll.
1994. "M o d e lin g N oniiegalivity via Truncated
Logi.slic and Norm al Di.mribulions: An A p p li­
cation to Ranch Land P rice A n a ly s is .” J o u r ­
n a l o j A g ric u litira l a n d E eso iirce E co n a in ics
19 ( 0 ;I 0 2 - I 4 .
Zarentbka, P . 1974. "Tian.sronnatioii u f V ariablc.s ill E co iio in c lric s.” In F ro n tie rs in
E coiioinciricx, cd. Paul Zarentbka. N ew Y o ik ;
Academ ic Press.
Environmental and Economic Accounting, and the Shadow Prices of
Natural Resources: Some Conceptual Issues and a Case Study of
Industrial Water Pollution in India
M.N. Murty and Surender Kumar
Institute o f Econom ic G row th
D elhi University Enclave
Delhi-110007
India
Februar} 2001
Atlstract
\\ aste disposal services offered by the environmental media to the industry arc productive inputs
along w ith the conventional inputs. Industry uses pollution abatement technologies com prising end o f
pipe treatment, process changes in production, and changes in the use o f inputs and prodilcts for
reducing pollution loads as per the environmental regulation, In this type o f situation the assumption
o f free disposal o f pollution is not appropriate in describing the technologies o f firm s generating
^pollution. For a firm w ith a resource constraint, the reduction leads in turn to the reduction o f
produclion o f output. A description o f tlic technology o f a polluting fin n as one o f producing jo in tly
good and bad outputs w ith the weak disposability assumption m akes it possible to account for the loss
in the production o f good output to reduce tlie bad output, pollution. T h e output distance function in
the theory' o f production describes the technology o f a polluting fin n in this w ay. The shadow prices
o f environm cnlal resources are derived in a general fram ework o f an o verall planning problem for the
economv in w hich environm ental inputs are productive inputs in the industry, use o f environment by
the industry affects the u tility o f people, and industry uses abatement technologies to reduce the
pollution. M odels for deriving shadow prices are provided w ith alternative specifications about the
technology o f polluting firm s. It is shown that in case there is a fall in the environmental quality with
the economic developm ent, the defensive expenditures estimated at shadow prices have to be
deducted from N N P to arrive at E N N P . Shadow prices o f a vector o f bad outputs (pollutants) are
obtained by estim ating the output distance function. The data collected for a large number o f
polluting firm s in Ind ia through surveys are used to estim ate the shadow prices. T h e
environm entally corrected N N P corrected for the industrial w ater pollution in India is estimated,
-^hc relationships between firm sp ecific shadow prices or m arginal costs o f abatement o f B O D ,
C O D . and SS and the index o f com pliance (effluent concentration ratio) show that there is an
increasing m arginal cost o f pollution abatement. U sing the taxes-standards approach to pollution
conirol. the taxes necessary for m aking the fimns to com ply w ith the national standards o f water
pollution are estimated.
T in s paper fo m is p a n o f the research for the project, ' E n viro n m en tally C o rrected G D P ; V alu atio n and A cco u n tin g for
ndustrial Poltunon in In d ia ’ funded by the W o rld B an k through I G ID R , M u m b ai. I express our thanks to the W o rld
Bank- and the M in is tiy o f E n v iro n m e n t and Fo rests. G ovt, o f Ind ia for fin a n c ia l support. 1 am grateful to the participants
II.
'.he u o rk ih o p al the Institute o f Eco n o m ic G r o u tli tor their comments on an e a rlie r draft o f this paper.
I IntrotTuction
'
V alu atio n and accounting o f environment resources are needed for three important reasons: (a) for
m aking
investment
decisions
in
environmental
management,
(b)
for
designing
economic
instruments for controlling environmental externalities, and (c) for accounting environmental
services in the valuation o f national income. There is a lot o f theoretical and empirical literature on
the valuation o f environmental resources (Freeman,"1993; M itch ell and Carsoir^ 1989). Also there is
a growing literature on the accounting o f environmental resources in the valuation o f nationil
incom e ( Hartwick, 1990; M a le r, 1991; Dasgupta and Maler, 1998; U N , 199Ta,b). The rules for the
sustainable use o f natural resources are found in various studies on optim al inter-temporal resource
i
allocation and sustainable development (Hotelling, 1936; Solow, 1974; H artw ick, 1978a,b).
H artw ick (1990) and Dasgupta and M ale r (1998) have shown that the net national product (N N P )
along the optimal path o f the economic programme can be measured at shadow prices o f
consunipiion, labour, man made capital and natural capital. The United N a tio n ’s methodology o f ■
integrated environmental and economic accounting (U N , 1993b) discusses various methods o f
estimating environmentally corrected N N P using market prices for private goods and the estimated
shadow prices for the non-marketed environmental sen ices. These methods provide for accounting
both productive and consumptive sendees o f environmental resources.
It
is !io\\
known
environment.
lhal sustainable
industrial development
requires
the preservation
o f the
industries create a demand not only for waste receptive services from the
environmental media: air. forests, land and water but also for some material inputs supplied by the
eiwironmcntal resources (for e.\anip!e, wood in the paper and pulp industry). Environmental
resource; can ensure a sustainable supply o f these scr\ ices, i f they are preserved at their natural
icgcncrair. e level or the demand for waste receptive services is equal to the waste assimilative
cap.acii\ o. the cin ironmental resources. Given lhai ihc demand for environmental services from
\ario u s ccononiic iicia itics can exceed tlic natural sustainable le\'els o f supply at a given time, and
it measures are not taken to reduce this excess demand to zero then il is likely that there can be a
degradation o f cn\ ironmental resources. The cost of reducing the demand for environmental
services to lire natural sustainable level o f suppl)' is regarded as the cost o f sustainable use o f
-
environmental resources and in the case o f industrial demand for environmental services; it is the
cost o f sustainable industrial development.
A s a part o f environmental regulation, a firm faces a supply constraint on environmental ser\-ices in
the form o f prescribed standards for the effluent quality. The effluent standards are norm ally fixed
suph that the demand for the services o f environinental media does not exceed the natural
sustainable level o f supply. The firm has to spend some o f its resources to reduce the pollution loads
to meet the effluent quality standards. The firm with a resource constraint w ill have'lesser resources
left Tor the production o f its main product after meeting the standards. Therefore, the opportunity
cost o f meeting these standards is in the form o f a reduced output o f the firm . I f all the firm s in the
industry meet the standards, the value o f the reduced output o f firm s is the cost o f sustainable
industrial development. H ow to estimate this cost for a competitive firm facing the environmental
regulation? It has to be esiimated by studying the firm ’s behavior in the decision-making regarding
pollution loads and the choice o f pollution abatement technologies. In some o f the recent studies,
the technology o f a polluting firm is modeled on one o f the two basic approaches using the
conventional methods o f the theory o f production: (a) Considering effluent as an additional input in
the production or profit function, and (b) B y including abatement expenditures as an additional
input in a cost function. In some studies, the pollution abatement technology is modeled with the
assumption that it is non-separable from the technology o f the main products w hile in others it is
modeled
ith the assumption it is separable. In response to environmental regulation, firm s may
adopt different types o f technologies to reduce pollution. Jorgenson and W ilcoxen (1990) identify
three different responses o f firms. First, the firm may substitute less polluting inputs for more
polluting ones. Second, the firm may change the production process lo reduce emissions. Third, the
^;imi ma\ invest in pollution-abatemeiit dc\ iccs. In practice, a firm may adopt a m ix o f these
methods. The first two methods are non-separable with the production processes o f main products
'■■hile the third method is knotvn as end-of-llie pipe method.
. here arc a luimbci ol empirical studies beginning with the early eighties that examine the impact
o f environmenlai regulation on the economic performance o f firm s'. The ultimate aim o f these
See M yers and Nakam ura, 1980; Pittman, 1981, 19S3: G ollop and Roberts, 1983; Conrad and M orrison, 1989;
.'orgenson and W ilco xe n . 1990; Barbara and M cConnell, 1990. and G ra y and Shadbegian. 1993, 1995.
studies has been to measure the effect o f pollution regulation on total factor productivity growth
(T F P ). Most o f these studies are based on production, cost or profit functions, with the pollution
variable modeled indirectly using abatement expenditure as one o f the inputs, The technology of
water or air polluting fim ts could be described as one o f joint production o f good and bad outputs,
the bad output being the pollution. The assumption o f free disposal (a multi-product firm can
produce more o f one output without reducing tl^e outputs o f other goods) that is normal Ij- made in ,
the conventional production theory cannot be'applied to describe the techj)ologies o f polluting !
firm s. Shephard (1970, p.205) noted that;
* '
'
‘
“...for th e f u t u r e w h ere u n w an ted ou tpu ts o f tech n o lo g y a re n o t Ukeiy to be freely
disposable, it is in a d v isa b le to en force f r e e d isp o sa l o f in p u ts a n d outputs.
S in c e the
p rodu ction fu n c tio n is a tech n o lo g ica l statem ent, a ll ou tpu ts, w h eth er eco n o m ic go o d s are j
w anted o r not, sh o u ld b e sp a n n ed b y th e o u tpu t vector y".
.Also, the conventional studies have im plicitly assumed that the firm s are operating on the
production frontier and that pollution control does not have an impact on production efficiency.'
However, man\' recent studies have shown that these assumptions are u nlikely to hold in many
cases,^ Fin ally, the profit or cost functions used to represent produclion technology require firm
specific prices, especially input prices,*' the reliable data o f which is difficult to obtain, A s w ill be
shown iq this chapter and the subsequent two chapters, the distance function approach for
describing the production technology of a firm w ill potentially avoid all these problems.
The remaining paper is organized as follows: Section2 discusses the
issue o f environmentally
sustainable income. Section 3 presents an analytical framework for the derivation o f shadow prices
ot eiivironmemal resources. Section 4 discusses alternative specifications o f technologies
nol lining finns in deri\ ing shadow prices o f polluiuiits. Section 5 describes the methodology o f the
ertimaiion o f shadov prices o f pollutants. Section
6
provides information about the data used in the
•-’ >[irnaiioii o f siiadou pnce.s and the specification o f output distance function to be estimated.
Section 7 pre.scius the estiinaics o f shadow prices o f had outputs. Section
8
discusses the design of
: Sire F a re c ta l. ISSV : Fan- c; at. 199J; Hakuni 1994; V aisau am e and K k e n . 1994;Poner and van dcr Lin d e. 1995;
C o jt m and Sw inion. 1996. and Surender Kum ar. 1999.
.- See recent studies on p o liulion abaiemeni cost functions in India Fo r exam ple, .MehU et al. 1995; James & M uny
199S: Pandey,199S, and S m ita M isra , 1999,
1
pollution taxes using the shadow prices o f bad outputs. Section 9 presents the physical and
monetary accounts o f industrial pollution in India and provides estimates o f the environmentally
corrected N N P o f India for industrial pollulion. Monetary accounts are developed using the
estimated shadow prices o f bad outputs. F in a lly , Section 10 provides conclusions.
2. Environmentally Sustainable Incomt
Thfcre are many definitions o f sustainable income (H icks, 1946). The general >iew .about sustainable
income is that it is the m axim um attainable income in one period w ith Ihe guarantfee that the same
level o f income w ill be available in future periods given the constraints on the resources: labor, man
J
made capital and natural capital. Therefore, income is straightaway related lo the availab ility o f man
made and natural capital. Alternatively, in Ihc neo-classical approach to sustainability, sustainable
income is defined as Ihe maximum amount spent on consumption in one period without reducing
the real consumption expenditures in future periods. In the face o f changing prices and interest rates
over time, this is the most appropriate definition o f sustainable income.
finplicit in H otelling’s
The same concept i.s
rule lor the efficient intertemporal allocation o f exhaustible resources
(Hotelling, 1931) wlrich states that the price o f an exhaustible resource should increase at the rate o f
interest, T lic use o f this definition in the theory o f sustainable resource utilization attempts to
establish how real consumption expenditure based on the e.xploiiation o f natural resources might
rerpain constant over time. M aintaining real consumption expenditure constant over time requires
maintaining a constant means o f production including man made capital, natural resources,
technology, and the level o f learning (huritan capital). The environmentally corrected net national
product fE N N P ) shows the amount o f this productive ba,se that can be used up over lim e. There is
now a lot o f literature about the problem o f estimating EN N P and the sustainable use o f
^ v iro iim e n ta l resources. Among these ihe significant contributions include H artw ick (1977,
1990.a.b); M alcr, (1 991): W citzman. H 9 7 6 j; Solovv, (1974, 1985, 1992); Ahmad et al. (1989); Lutz,
11993); and ih e U X . (1993).
Studies b_\ Solovv. (1 9 -4 ) and Hartwick. (1977, 1978a,b) have tried to derive the conditions under
which real consumption expenditure might be maintained despite decJining stocks o f exhaustible
resources. The m ain result o f these studies known as the H artw ick rule, slates that consumption may
be held constant in the face o f exhaustible resources only i f the rents deriving from the inter-
temporally efficient use o f those resources are icmvcsicq in me reproauciDie capital. The
relationship o f the H artw ick rule with sustainable income hinges on the assumption o f the
subslitutabihty between men made capital and natural capital. Solow (1974) using the Rawlsian
m axim in principle has shown that in the case o f homogenous capital the optimal inter-temporal
resource allocation requires the maintenance o f existing capital stock by making the investment
exactly e^ual to depreciation. Even in Ihe case 0)"heterogeneous capital stocks, it is shown that it is
possible lo derive the investment rule that maintains the productive capacity o f capital slock
provided there is sufficient substitutability between man made capital and natural capital (Hartwick,
1978,b).
3
T he main criticism about the Solow -Hartw ick definition o f sustainable income is that the man made
capital could not be substituted by natural capital. Natural capital can be exploited by man, b
could not be created by man. According to the thermodynamic school (Christensen, 1989), natui
capital and man made capital arc not substitutable. One can think o f two subsets o f inputs,
Oi
containing the natural capital stock primars' inputs’ and another containing man made capital ai
labor, the agents o f transformation'. The substitution possibilities w ith in each group can be hit
w hile they are limited between the groups. Increasing income means increasing the use o f inpu
from both groups. Given the limited substitutability betw-een man made capital and natural capita
it is necesgaiv- to maintain some amount o f the natural capital stock constant in order to maintain th
real income constant at the current level over time (Pearce et a!., 1990; Klaasen and Opschooi
1991; Pcarcc and Turner. 1990). This can be la heavy restriction on development i f the current level
o: natural capital stocks are chosen as a constraint, since it requires a banning o f all projects am
policies impacting the natural capital stock. As a way out o f this problem, Pearce et al. suggest thi
use o f .shadow projects. These arc the projects and policies designed to produce environmenta
benefits m terms ol adciiions ic natural capita! to exactly offset the reduction in natural capital
resuhnig irom
liic
dc\ ciopmcntal projects and policies. D aly (1990) has suggested some operational
prmeipics lor maintainin.j naiural capital at a sustainable level. For example, (1) in the case of
le.
cw able
res.'UR-cs.
se;
all har\esi levels ai
les. s
tlian or equal to Ihc population growth rate for
some predetermined population size, (2 ) for pollution, establish assim iiaiive capacities for receiving
ccosystcnis anc niaiirUiir. waste di.sciiargcs below ihcsc Icrcls. and (3 ) for non-renewablc resources.
:
receipts from non-renewable extraction should be divided into an income stream and an investment
stream Hie investment stream should be invested in renewable substitutes (biomass for oil).
- ■J
In the neo-classical definition of sustainable income, it is important to know what constitutes the
consumption e.xpenditures especially when environmental resources and people’s preferences for
th^m are involved. The concept o f consunyitLon in neo-classical economics implies two key
assumptions: aji exogenously determined set o f preferences and an exogenoujly determined heritage
comprising both a set o f resources and the property rights that map those resources'into 'the
consumer constraint set. In the case o f environmental resources, because- o f their public good
properties, the exogenously gi\en consumer preferences are not readily translated into prices
through markets and the propert\ rights can not be defined and implemented to map them into the
consumer constraint set. Therefore, the notion of consumption should also imply exogenously given
instruments and the institutions to deal with environmental externalities. Instruments like pollution
taxes or marketable pollution permits help to impute prices for environmental resources so that
consumer preferences tor them arc reflected in the consumer budget decisions.
In most o f the
models dealing witli sustainable dcvciopnicnl in natural resource economics, this feature o f
environmental resources is not explicitly incorjioratcd. The environmental services are public goods
requiring non-market solutions to manage (hem efficiently. These solutions should form part of a
model of sustainable development.
3. Shadow Prices o f Natural Resources
Some recent studies (Hanwick. 1990b; Maler, 1991; Dasgupta and Maier, 1998) have derived
shadow prices for ein-jronmenial resources witli different descriptions o f the technology o f polluting
G..en the environmental regulation, finns choose a combination of technologies comprising
eiiJ Oi !'.“ c ircatmcn;. orocc.ss changes in production, changes in the quality of products and input
UjOicO;
, nc noiimior.
.oads accepted by the environmental media may be regarded as
cn-.-ironmrmal inpui.A lim; the mdustry receives. The'environmental inputs can be considered as
..am-.' along v. ;;r, conventional inputs. The demand for environmental scn'ices can be
intcrpreteij as a derived Oemand arising out o f use o f certain inputs in the production o f a
^ommoL... .Also, the tcchnoiog> of a polluting firm can be described as one o f joint production of
good anu oad outputs. t!u- oad output being pollution load. The finn can reduce pollution loads by
reducing its production implying the pollution load is not freely disposable'*. The output distance
function with a weak disposability assumption describes this technology (Shepard, 1953,1970; Fare
et al., 1994; Fare and Primoni. 1995). Tiie description o f the technology o f polluting firms by the
distance function accounts for ail the possible pollution abatement technologies that the firm uses.
Consider an economj- producing a commodity X, using capital, K,. labour L, and environmental
inputs M,^at time t. The production function o f Xi is given by;
X ,t F ( K f ,'L ,, M ,)
.( 1 )
F is concave and an increasing and continuously differentiable function o f each ’o f its variable's.
Environmental inputs here may refer to the waste disposal services pro\ ided by water resources and
atmosphere. Let C,
represent aggregate consumption at time t and E,. the pollution abatement
e.xpenditure in the production o f X at time t. The net accumulation o f physical capital therefore
satisfies the condition (2).
K
.
= - j ^ =
)~
C ,-
E{A,) ,
(2)
where A, is the rate o f poduiion abatement.
Let Si represent the stock o f environmental resource (quality o f water resource or atmosphere) a!
lime t, j\fS, I the natural rate o f regeneration o f this stock (natural rate o f assimilation o f pollution
loads). Ml. the rate o f depletion o f this slock (rate of degradation o f environmental quality).
Therefore, the net accumulation o f the stock o f environmental resource satisfies the condition (3),
dS:
S= —
= A'(*5’, ) - rl/. - H
j
Assuming that the utility depend.s on the change in slock o f environmental resource', the inter­
temporal utilii\ function in the utilitarian form is given as ,
U{C:.L..S)e-^d:
where L
conciw-,;. iccre-.Miig in C and decreasing in S and L and r is the rate o f disc
Lli u> con.'ijc; the planning problem o f government consisting o f 3'ariables
Ol iniciL.M
t i..r iu K ,. I .
r l'iii
'
H an Mck 1.
.
^ wonsiderr, i ... ro iin .R '”
,1
as an aryunieni of the pmduciion funotion assuming higlicr pollution
Tvnm enial regiiianor., higher pollution loads eeneraied require hicher
ivodueiion ofgood ouipui. It implies that pollution is not freely disposable.
also considers tnis type oi utdity function in measuring the pollution effects on NNP.
(C ,L ,M ,A ,K and S). Given the initial values o f man made capital and natural capital, K o and So,
this planning problem is feasible i f it satisfies conditions ( I) . (2) and (3).
Choose the control variables (C, L. M . A ) (o maximize,
sujbject to the conditions
'
di
^
—
di
= A '{ 5 0 - M , . A ,
Increase in the use o f waste disposal services by the industry results in the decrease in
environmental quality and hence a fall in the utility o f its users for consumptive purposes..On the
other hand, pollution abatement by the industry results in improved environmental quality and
Opcrease in utility. Let p, and q, represent the shadow prices associated with the constraints on man
made capita! (K,) and natural capital (S,).
The Pontryagin M axim um Principle Arrow and Kurz,
(1970) Slates that the shadow price system satisfies in addition to feasibility constraints (1), (2) and
(3)
the following equations ;
dp*,
.
—
dq*
(6)
= q,\r- N\S))
d,
These two conditions (6) and (7) ccfinc the optimal time path o f prices o f man made capital and
.^atural capital in the economic prceram.
In the case o f man made capital K, the appreciation o f
price n\ci i:nic siionld be equal t(> t:;e renttil on capital (p,*r) minus the dividend p, * F ( .In the case
of natural ccena:, tiie uppicciation ■: 'its price should be equal to royalty (q>* rj minus bonus for the
rcgencraiio:
capital due to maiiKenaiice o f stock (qi* » ^S)y
Now the current \ .:iiic Mamiltoniar o:Thc economic program f5) can be written as.
H, = L1(C„ L .. S j - pN (F t K ,, L,. M.,.. - C,- E,)
where C ;. _
variables.
M .. A ; are control
q*, (iN(S,)-M,+A,J,
(8)
. ariab les. R ,. $■ arc state va ria b le s, and p .*. q,* are co-stalc
Maximisation of Ht with respect to Q Ls, Mi.and At yields the canonical equations
Uc = p V
- U
i
=
p
( 8 a)
* ,F
l
=
(gbj
w
-U s + p*,FM = q*t.
( 8 c),
- U s + p * ,E ' = q * L
t
From (Sc) and ( 8 d) we have,
( 8 d)
Fm = E
( 8 e)
Equations ( 8 a) and ( 8 b) im ply respectively that along the optimal path the price o f consumption is
<
equal to its marginal utility, and that wage rate is equal to marginal disutility o f labor. The pollution
load accepted by the environmental media is (he environmental input in the production o f commodiiyi
X and it also enters in the utilii.v iunction as environmental pollution providing disutility . T lic industij
has a pollulion abatement activity the cost function o f which is given as E {A ,). Equation ( 8 c) explains
that the industry uses waste disposal services up lo the level at which its price is equal to the nc/^
marginal benefits (marginal value productivity o f environmental services minus the marginal disutilTly~
from pollulion I . Equarion ( 8 d) shows that the industry carries pollution abaiement up to the level al
which the net niarginal cost o f abatement (marginal cost o f abatement minus marginal utility from the
reduced polluiion) is equal to ihc price it has to pay for the waste disposal senhces. Equations ( 8 c) and
( 8 d) toge\ticr y ield equation ( 8 c i winch show.s that tlic industry uses environmental input and does
pollulion abatement upto levels at wliicli the riiargiiial productivity o f waste disposal services is equal
to the margmai cost o fpo lluiio n abatement.
'
Using Euler’s theorem, it can be written that U (C ,, L ,. S j = U , C + U| L + U sS . Therefore, equatior
( S i can now he wi ilien le.
U L
H-=
C -
L s S - q ’y
-
: S
n":
u, L
a - c - —
px
-
K - r s
or
The first three components on the right hand side o f equation (9) constitute the conventional national
income. I f S is less than zero, it means that cnvironm cnial quality falls with the economic
developmenl, equation (9) shows that defensive expenditure ( E ’ S j has to be deducted from national
income to get E N N P .
)
■
4.* Valuation of Environmental Resources: Alternative Models
Demand for waste disposal services m ay be considered as derived demand arising .out o f the use o f
certain inputs in the production o f X ,. Use o f coal and other fossil fuels by the industry creates a
demand for waste disposal services. The industry can reduce pollution
throughappropriate input
choices. Assum ing that the pollution load generated by the industry is proportional lo the coal used
in production o f X ,. the pollution load is given as
,
M, = a3 ', w here Y , is tiic amount o f coal used by the industry and a. is the ratio o f pollution load to
coal used. The H am iltonian o f the planning problem in ihis case can be written as
H, = U (C „ L „ S ) + p *, ( F ( K „ L „ V,) - C,- ni, I-. -E ,l - q*, (K (S ,)- M .- .A ,)
(10)
Maximisation o f 11, w ith respect to C,. L . 3', and A, \ ields
U c-p L
F la )
-U i= p * , F l =
:
w
(lib)
-a U s + p * .F v - n i i = a q * i,
(11c)
-Us + p* l E ’ = q*
(1 Id)
^ Ic ) can be written as
P * I F y - ill,
-Us + -------
= q* 1.
>■N ',1
a
From (1 Ic ’) and (1 Id l it follow.s that
p * ,F Y - m ,
_____________
= E'
11 Ic i
a
Also from ( l i e ) , it follow's that
n
______
_
(lie '
T h is e q u a tio riih o w s that the polluting input is used by the firm upto the level at w h ich its margin;
value p rod uctivity is equal to its m arket price plus the cost o f abatement o f pollution generated fc
using one unit o f this input at m argin. Equation (9 ) for environm entalh'
corrected N N P can b
rewritten in this case w ith E taking the value given m (H e ).
A ltem ati'vely, the technology o f a po lluting firm can be described as one o f producing bad and goo.
outputs jo in tly b y the output distance function in defining the environm entally
corrected N NP
W ith the assum ption that a fim i could not dispose bad output environm ental pollution freely, thi
marginal^ cost o f abatement or shadow price o f bad output can be defined by u sinc the outpu
distance function. Consider X , = F ( K i, E ,. M ,) as the output distance function where X , and M, art
good output and bad output (po llutio n) produced jo in tly by a fim i. W ith the weak disposability
assumption, it fo llow s that d X , / dM, > 0. That means that the firm has an opponumic- cost ol
reducing bad output in tenns o f good output that is also tlie shadov. price o f pollution. The
H am iltonian o f the planning problem is now given as,
H, = U (C „ L „ S ) - p*, ( F ( K „ L ,. M ,) - C ,) - q*, (K (S ,)- M ,]
The canonical equations arc given as,
(12)
■
( 1 2 a)
^Ui = p '* ,F l = w
-U s + p '* ,( d X |/ d M ,) = q * ,,
^j2c)
Using (1 2 ) and ( 12c). the H am iltonian fo r the cin iro n m cn iaily correcicd N N P can be written as
Hi -
+ ( d X ,/ d M ,) S
n .3 )
5. O u tp u t D ista n c e Fu n ctio n and the S h ad o w P ric e s ol E m iro n in e in a l .Sert iees
The co in c n iio n a l p r o d u c l i o n fuiiciion d e f i n e s the nui.Mimtm outpii: lita. c an b e p r d d i i e c u from at
exogenously given input vector w h i l e the c o s i f ui i c i i on d c f i n o the m i n i n u u n co.-: u- n m d i i c c tin
exogcnoush' g i v e n output.
m ulti-output case.
The output and iiipui d i s i a n e c hi ncu on . - e c n e r a i i s e tite.se nuiK' n.- lo ;
The output distance function describes "how far” an output \ectoi- is from the
boundary o f the representative output .set. g i v e n the fi.ved input \ e c io ;, T lie i n p u : d i sUu K e iuncoon
12
shows how far is the input vector from the input vector corresponding lo the least cost for producine
Suppose that a firm employs a vector o f inputs .v e 'jU * to produce a vector o f outputs y e
,
91*''+ , are non-negative N- and M-dimensional Euclidean spaces, respectively. Let P (x ) be the
fct^ible output set fo r the gi%en input vecto r,x and LC e ) is (he input requirement set for a given
output vector jX N o w the technology set is defined as;
,
T = lO '.v) e 51*''*'''+ y e P (x), x e L ( y ) } .
(1 4
The output distance function is defined as,
,
Do (-VV) = mm {
'
> 0:0'/ ff) e P(.v)} V x e 'jU+
(15)
Equation (15) ciiaracterises the output possibilit\ set by the maximum equi-proportional expansion
of all outputs consistent w ith the technology set (1 4).
The assumptions about the disposability o f outputs become very important in the context o f a firm
producing both good and bad outputs. The normal assumption o f strong or free disposability about
the technology im plies.
i f 0 ; ,.v : ) € P(.x) and 0 < vi * S y , , 0 < v ;* S j ' 2 =>
) e Rff)-
That means, we can reduce some outputs given die other outputs or without reducing (hem. This
issunipiioii ma\ c.\cludc impoiiant production processes, such as undesirable outputs. For example,
in the case o f w ater pollution. B io Oxygen Demand (B O D ), Chemical O.xycen Demand (C O D ) and
Suspended So lids CSS) arc regulated and the fim i cannot freely dispose o f them: The assumption o f
weak disposabilit\ is relevant to describe such production processes.
The assumption o f weak
lisposabilit\ im plies,
i f V £ P(.v) and 0 < 6 * < 1 ^
B v € I’ t.v),
''^ hai mean.-, a iim i can reduce the bad output only by decreasing simullaneousty the output o f
desirable produce T h e idea oi dern ing shadow prices using output and input distance functions and
the dualit'. .CMilt^ i.s origiiiailv trom Sliepliard i Dt70).
(1990) is i;ie t if ii
111
A study b\’ Fare. C rossko pf and Nelson
compuiiiig riiadow prices using the (inpuil distance function and non-
paramclnc linear niograiiim m g method.s, Fare ei al.
(1993) preseni the firs! sludy deriving the
shadow prices o f undesirable outputs using ihe output distance function.
13
The derivatioD o f absolute shadow prices for bad outputs using the distance function requires an
■ assumption that one observed" output price is a shadow price. Let y , denote the good output and
assume that the observed good output price ( r , ”) equals its absolute shadow price ( r , ‘) (i.e ., for n i= l.
Fare et al. (1993) have showTi that the absolute shadow prices for each observation o f
undesirable output (m=2,......,M ) can be derived as*,
( r : ) = ( n ° ) * ------- (16L
3 D o ( x ,y ) / d y i'
The shadow prices reflect the trade o ff between desirable and undesirable outputs at the actual m ix
o f outputs,, w hich m ay or m ay not be consistent with the m axim um allowable under regulation (fa re
et al. 1993, p. 376).
Further, the shadow prices do not require that the plants operate on the
production frontier.
6 .1
ranslog O utp u t D istance Function and D ata fo r In d ia n W a fe r Polluting In d u s try
in order to estimate the shadow prices o f pollutants (bad outputs) for the Indian industry using
equation (1 6), the parameters o f output distance function have to be estimated. The translog
functional form
is chosen for estimating the output distance function for the Indian water and air
polluting industries which is given as follows:
In Do(.v,
.vj = Cio + Zp„
(V m-) +
in
I I
+I
a„, In
>■„, +
1/21
I Pnn' (In x„)
(In
x„.) +
Ynm ( I n A „) ( I n y „ , ) . + u D j
1/2
I I
(In
>■,,)
(1 7 )
where X and y are respectively, N x l and M x l vectors o f inputs and outputs,
andD, stands for the
dummy t ariables used for time periods and industry specifications. The data used in thispaper i.s
from two surveys o f water and air polluting industries in india.*
The data from these surveys
proside information about the characteristics o fp o llu lin g firm s for the years 1994-1995, 1996-1997,.
199 '-199S. and 1999-2000. It consists o f sales value, capital stock, wage b ill, material input cost,
w ajie water volum e, influent and effluent quality for B O D (B io Oxygen Demand), C O D (Chem ical
O.xyaen Demand) and S S (Suspended Solids), capital sto c k , wage bill, and fuel and m aiena) input
* See Fare (1988 ) for derivalicm.
' M any earlier studies for estimating shadow prices o f p o lljtants have used the im asloE functional form for estimatiriE
the output distance lunction. These include Pitman (1 9 8 1), Fare ct al. ( 1990), and Coggins and Svvinton (19961.
A Survey o f W ater PoJiuiIng Industnes in India, 1996 and A Su rvey o f W ater and A ir polluting Industires in India,
2000. Institute o fE c o n o n irc G ro n th , D elhi.
14
cost for a sample o f 60 firms for the year 1904-1905 and for a sample o f
120
firms for the three
years during 1996-1999. Thus the data constitute an unbalanced panel, These firms in the sample
belong to tanneries, chemicals, fertilisers, pharmaceuticals, drugs, iron and steel, thermal power,
refining and others. For estimating the output distance function, the technology o f each water
polluting plant is described by jo in t outputs: sales value (good output) and C O D , B O D and S S (bad
outputs) and inputs: capital, labour, and fuel ar\d materials. In the case o f air polluting industries, the
tiad outputs considered are SO j, N O i and suspe'nded particulate matter (SPM J) However, most o f the
firms in the sample could not provide all the required information about the airpoOution.
The water polluting firms in the Indian industry are supposed to meet Ihe standards set for the
pollutants (35mg/l for B O D . 250mg/l for C O D , and lOOmg/1 for SS P ) b)' the Central Pollution
Control Board. Command and Control regidatory instruments are used to make the firms realise the
standards. Most o f the fiims in the sample have effluent treatment plants and in addition some firms
are using process changes in production and input choices to achieve the effluent standards.
However, there is a large variation in the degree o f compliance among the firms measured in terms
of ratio o f standard to effluent quality. The laxity of fonnal environmental regulation by the
government, use o f command and control instruments, and the absence o f informal regulation’ by
the communities in the neighbourhood o f the firms can be regarded as factors responsible for large
variations in the compliance to the pollution standards by the firms. Table 1 provides the descriptive
statistics o f variables used tn the estimation o f output distance function in this paper.
' For empincal evidence aboui informal regulalion hv,
1 999,
'
losal communities see Murty « al. (1999) and W orld Bank.
15
Table 1: Descriptive Statistics of Indian W ater Polluting Industry
----- iM ean
^
JMedian
IMaxJmum
11802.008
652.97
:26916.46
10.3825
.3320.584
1951.7418
:321.217
138516.1
10.515
12717.406
iW
11165.321
.40.245
1349821.8
10.060211
18577.52
.379,084
18660.077
|210000
^4538.09
1
■
2362500
0.004257
IVW
12622.139
I
1616054
:175
16352,55
1
1650
1684375
13.5
.176436.27
11500
j 6159375
35
1597266.6
1312
115658500
13.25
'1081616
:30
6390
10.095-
■540.3057
1
1
IM inim um
IStandard
IDeviation.
■T
I
'
!
■■
,
lln flu e n t ( cone.)
IBOD.
ICOD
:SS
' 1
!109910.4
— ---------------------- 1
1 .
1158892.7
E ffluent ( c o n e .)
i5798211
r
1
{
'
I
-
jB O D
1147.2786
COD
;753.6231
190
i32500
110
,2925.207
SS
1124.7263
63
i3500
10.095
,382.2771
BOD
126459.308
■164.010
12570000
105
■164000
COD
! 177840.962
,316.680
140914,048
'1,344
,5452.796
1257096.969
87.500
:15658,500
10.105
2086.237
;238.304
1
11219,402
1
I201.813
111.288
11311.975
10.002
138.160
'41.580
121.,875
1087.005
114.565 •
1
*
|9594.375
I
11771.875
10.005
304.602
'Influent load
;SS
.E fflu e n t load
IBOD
COD
.'SS
Pollution load
j
as per standard
j
I
|48.541
1
.
16.300
[708.750
10.005
113.946
COD
(404.513
52.500
■5906.250
10.044
949.552
SS
|161.805
121.000
;2362.500
10.017
379.621
BOD
,
Notes: T; Turnover(Rs million)
M; Material in p u ts(R s. million)
W : W age-b ili(R s. Million)
K: Capital Stock(Rs. Million)
VW : W aste W ater V o lurn e(KL)
BO D Load: Bio-oxygen dem and(tons)
CO D Load: C hem ical oxygen dem and(tons)
SS Load: Suspended Solids(ions)
16
——
7. E stim ate s of O u tp u t D istan ce F u n c tio n and the Shadow P ric e s o f E n v iro n m e n ta l Services
In this section,- a linear programming technique is used lo estimate the parameters o fa deterministic
translog output distance runclion { A ig n cr and Chu. 1968). T h is is accomplished hy crfcli'inn
problem,
m a x I[ ln D „ ( .v ,> ') - ln 1],
HSl
sjabject lo
' (i)
ln b o (v ,y )
< 0
(ii)
{ d In D „ {x , y )) / ( d Jn y ,) > 0
(iii)
(d In D o (x ,y ))/ (e in j> i):S O
' (iv )
(P In D „ {jr,>-))/(5 In Xi) < 0
,
(v)
I am = 1
L amm'
(vi)
“
0
= ttm'm
Pnn' ~ Pn'n
Here the first output is desirable and the rest o f (M - lj outputs are undesirable, The objective
function m inim ises the sum o f the d c\ialio n s o f individual observations from the frontier o f
technology. Since (he distance function takes a value o f less than or equal to one. the natural
logarithm o f the distance function is less than or equal lo zero, and the deviaiioti from (he frontier is
less than or equal to zero. Hence the m axim isation o f the objective function is done im plying the
minimisation o f sum o f deviations o f ind ividual observations from the frontier o f technology. The
constraints in
(i) restrict the individual observations to be on or below the frontier o f the
technology. The constraints in (ii) im ply that the output distance function is non-decreasing in good
outputs. In other words they ensure that the desirable outputs have non-negative shadow prices. The
distraints in (m ) im ply that the output distance function is non-increasing in bad outputs. They
cstrict the shadow prices o f the bad outputs to be non-positive. The constraints in fiv ) im ply that
the output distance function is non-increasing in inputs. The constraints in (v) impose homogeneity
o f degree -G in outputs (w hich also ensures that technology satisfies weak disposabilitv o f outputs),
Finally, constraints in (v i) impose sym m etry. There is no constraint imposed to ensure non-negative
values to the shadow prices o f undesirable outputs.
17
Table
2
provides respectively linear prograinniing estimates o f output distance function for t
Indian water and air polluting industries. Table 3 provides estimates o f industry-specific shade
prices for bad outputs, B O D , C O D , and S S based on the parameters o f translog distance functii
estimated using programming approach. These shadow prices arc negative, reflecting desirah
output and revenue foregone as a result o f reducing the effluent by one unit (ton) per year. F
instance, toe average shadow price for water polluting Indian industries is Rs. 13,290 for B O D , R
50,623 fdr C O D , and 16,676 for S S per Ion at 199^97 prices. That means the^educ.tion o f B O D t
one ton reduce.s Rs. 13,290 worth o f production o f positive output. There is a signifTcaht variation I
shadow prices o f pollutants across the sample o f observations as shown in Tab le 3. The range <
shadow prices for B O D is R s. 36,000 to R s . 113 per ton, for C O D , it is R s. 1,74,000 to R s, 397 ps
ton, and for SS, it is Rs. 68.000 to R s. 623. T iiis can be explained by the variation in the degree c
compliance as measured by the effluent concentration, and different vintages o f capita! used by th
firm s for the production o f desirable output and the pollution abatement.
'
A recent study about the Canadian paper and pulp industry by H ailu and Veeman (2000) ife
estimated shadow prices for B O D and S S using an input distance function. The year-wi.se estimate:
o f shadow prices obtained using aggregate time series data for the period 1959 to 1994 are reported
The average shadow prices for B O D and SS for the period 1990-94 are reported as 436 and 663
Canadiaj) dollars per ton. A n earlier study,by Fare et al. (1993)'® about the paper and pulp industr
in the U S has reponed a very high shadow price o f 1043.4 U S dollars per ton o f DO D at 197i
prices. T h is stud) has also reported very high shadow prices for air pollutants SPM and SO.,, The,
are respectively. 2 ;.2 7 0 .0 and 3,696.6 U S dollars per ton at 1976 prices.
Coggins and Swintor
(1996) have estimated the shadow price o f S O ; emissions by coal-buming electric utilities in
W isconsin as 322.S69 U S dollars per ton at J992 prices. Kum ar (1999) has estimated the shadow
price o f SPM for thermal power generation in India using output distance function amounting to R;,
326.180 per ton .at 1993 prices.
Th ey have used data repurled in Pi,m an. 1981 and t983 R n ihin^-paper and pulp m ills operating ,n W is
1976.
IS
T a b le 2: P a ra m eter E stim a tes o f O u tp u t D ista n c e F u n ctio n for all In d u strie s w ith W a ter
farair.eter V alue
Cor. s u a n t
-2 . 839
A
1 . 2 0 2
Param eter
Value
xri
- 0
Value
P aram eter Value
Yi Xi
- 0 . 14
D1
0 .133
D2
-0.059
A
-0.155
Y i Yj
0 . 004
Y,X3
0.228
.
-0.062
$4
-0.039
Y i Y3
0 . 025
Y, Xi
-0
Xi
0 . 501
Y i Y4
0
. 008
YaXj
h
-1.355
Yj Y j
-0.006
-0,083
Y zY4
0 . 0 0 2
h
I
-0.007
. 162
Parameter
- 0 . 0 J . 3 - Y1 X2 .
,
1
■
.002 ,
D3. .
.
- e .034
D4
0 . 109
4 . 12E-05
D5
-0 .134
Y 2X 3
-0 .0 0 1
D6
-0.195
Y, Xi
-0 .0 0 2
D7
0 . 132
.1
tc
-0.047
Y3Y4
- 0.003
Y 3 X2
-0 .0 1
D8
(2 '
0
,002
X 1 X2
0 .142
Y,X3
-0.008
D9
0
. 088
0
.016
Xixj
0 . 078
Y4 X 1
-0 .000597
DI O
0
. 182
X3 X 3
0 . 034
Y4 X 3
0.0006466
Dll
0 . 171
Y4 X 3
-0.003
fc
0 . 000555
-0
. 06
'ioies: V |: Turnover {Rs. M illion)
V 2: BOD (Tons)
V3 : COD (Tons)
V j: SS (Tons)
X|: Materia! Cost (Rs. million)
X i; Labour Cost (Rs. million)
Xy. Capital (Rs. million)
19
■
-0.152
Table 3: Descriptive Statistics of Estimates of Shadow Prices of Water Pollutants
1
Industrv'/Polliitant
1 Mean
O verall
BOD
0.0132901
COD
0.0506225
SS
0.0166764
Leather
BOD
1
: 0.0107059
COD
'
’
0.0631765
SS
0.0217059
D istille n '
BOD
0.0186957
COD
'
0.0451042
SS
.
0.0270435
Chem icals
BOD
0.0111818
CO D
.
0.0522182
SS
0.0130909
Sugar
BO D
0.0122992
CO D
0.0558268
SS
0,0167795
Paper
&
Paper
Products
BOD
0.0184694
COD
0.0291837
SS
0.0184286
Fertilizer <
1BO D
'
: COD
1 SS
1 Drug
Phaniiaceuiical
BO D
‘ CO D
. SS
: Peiro-Chemicals
I BO D
' COD
i SS
1 MiSL'
j BO D
CO D
SS
S .D .
M inimum
: \r!,v,m ,,m
0,0060858
0.0266572
0.0086278
0.0001130
0,0003972
0.0006226
0.036
174
i 0 068
.
0.00367020.0329322
0.0081759
0.0095462
0.0397984
0.0149225
0.0050299
! 0.0255268
i 0.0051398
■
0
X 0 .0 1 6
_ 'J .u u s
1
0 -0 0 1
0.007
0 0 3 ? ■'
0,003
0.0003972
0.008
:
0 -0 0 1
'
0.036
174
0.068
0
0 .0 2
0.005
I 0.007
0.136
0028
1
1 0.004085
0.0206413
0.0075665
0.029
0.15
0.05
0 .0 0 2
0.003
0 .0 0 2
!
0,0043498
i 0.0189458
0.0057591
0.0106
0.05585
0.01065
0.0046043
0.0226792
0.0055939
0.004
0.026
. 0.106
0.035
0 .0 0 1
0.007
0 .0 0 2
0 .0 2 1
0.007
0.001
0.091
0 .0 )9
&
0.0092813
0.0638333
0.0206667
0.0077071
0,021599
1 O.OOS968
0.0004143
0.006
■ 0.002
. 0.02
0.092
0,029
0.01365
i 0 .0 4 1 "
0.0125311
i 0.0055086
i 0.0227269
10.007786
0.006
O.OOS
0.0006226
0.025
0.099
0.027
i
1
1
0.0134458
0.0592667
0.012
i 0.010)472
| 0.0393)46
1 0.0080356
20
0.000113
0.005
0.001
0.036
0.129
1 0.032
1
1
1
!
8
.
Shadow Prices o f Environm ental Services and the Design o f Econom ic Instrum ents
The shadow prices o f B O D and CO D which may be interpreted as the marginal costs o f pollution
^abatement are found to be increasing with the degree o f compliance o f firms. Taking the index o f
non-compliance by the firms as the ratio o f effluent concentrations o f B O D , C O D , and S S , it is
found that the higher the index, the lower the shadow price. That means there is an increasing
marginal cost o f abatement. Considering the Ictgarithm o f shadow price as a dependent variable and
the logarithm o f effluent concentration and the waste water volume as independent vapables, the
estimates o f the marginal cost o f abatement o f B O D , CO D , and SS are given as foflows:
In B O D S = -3,914 -0.004 InW - 0.0131n B O D C ,
’
= 0.0003
(- 9 .S 4 I) (-0.131) (0.041)
In CO DS =
0 .3 3 7 -0 .1 9 9 9 ln \V -0 .0 9 6 liiB O D C .
(0.S57) (-7,038)
(-3 .1 2 2 )
(6 )
(-2.1 J4)
In SSS = -2.43S - 0.0941nW - 0.012ln S S C ,
(-5.987)
R^ = 0,138
R ‘ = 0.030
(-0.260)
Note'. Figures in brackets are I values.
B.ODS: B O D shadow price
CO D S: CO D shadow price
SSS: SS shadow price
W; Wasie water v olume
B O D C ; Concentration o f B O D (mu/l)
CO D C : Concentration o f CO D (m ^ l)
SSC ;
Concentration o f S S (mgi'l)
ri'n the case o f COD there is a statistically significant negative relationship between the shadow price
and the compliance index implying that the higher the degree o f compliance the higher is the
marginal cost How ever, in the case of B O D , and S S , the relationship is negative but not statistically
sieniftcanr. .Also, the csiimatcs show tliat the shadovv prices o f undesirable outputs fall with the
wastewater volume in the case of B O D , CO D , and SS. In other words, there is a falling marginal
cost with respect to pollution load reductions or scale economies in the pollution abatement ” .
" M ehlaei al., 1995; .Vlurty et a j.. 1999; Pandey. 1998; and M isra, 1999.
21
The above estimated marginal cost o f abatement functions is useful in designing pollution taxes
India Tor controlling water pollution. The standards given for B O D , C O D , and SS are respectivi
35mg/l. 350mg/l. and lOOmg'l. Following the taxes-standards approach (Buam oi and Oates, 191
if taxes are designed and le\ ied such that the tax on each pollutant is equal to the marginal cost
abatement corresponding lo the standard, the polluting firms w ill have incentives to comply w ith I
standards. Using the estimates o f marginal cost o f abatement based on conventional cost functioi
the earlier studies in India ( Mehta et a l.l9 9 5 ; M urty et al. 1999) have also de>lt with the.probls
designing the pollution taxes using the taxes standards approach. The taxes o n 'B O E f,.C O D , and
1
are respectively estimated as Rs. 20,157, Rs. 48.826, and Rs. 21,444 as given.in Table 5.
Table 4: Estimates of Pollution Taxes per Ton of Pollution Load as per the Taxes
Standards Approach (Rs. at 1996-97 prices)
BOD
COD
SS
2 0 ;5 -
48S26 ■
21444
9. Monetary and Physical Accounts of Pollutants
Physical accounts o f influent and effluent loads, pollution reduction actually obtained, and poliutic
reductions required as per the standards for tlie Indian water pollution industry are reported in TabI
5.
For estimating ens ironmentally-corrccted N N P, estimates o f net additions to the stocks o f
pollutants in the en\'ironmentai media are-needed, T lie effluent loads o f B O D , C O D , and S
generated by the mdusiiy' in a given year are additions lo the stocks o f these pollutants in th
enrironmental media. Depending upon the natural assim ilative capacity o f the environmental medi
to absorb certain pollution loads without affecting itself, the industry makes additions to the stock!
I f th-e slocks o f pollutants in the environment have already reached the levels at which the natui?
assimiiati'.-e capacii\- i.s zero, the effluent loads generated by the industr>' are sim ply additions to th
sto ck;. .A,S5 uming that the standards for water pollution in India are fixed such that the pollutioi
loaos generated by the industry are equal to the natural assim ilative capacity o f water resources
there v- ik be net additions to the stocks if firm s do not meet the standards. For example, the effluen
loads o f B O D , C O D , and SS for the Indian industry are respectively, Rs. 470,700,04; 2408,572.98
anc 39:.622,71 tons during the year 1997-98. The effluent loads as per the standards an
respectively 95.87S.5S, 798.991.518, and 319,598,582 tons, The difference between the effluen:
22
load actually generated by the industry and the effluent load as per the standards could be taken as
net addition to the stock o f pollutants. In this case, for estimating environmentally corrected NNP
after accounting for industrial pollution, only Ihe value o f Ihis net addition to the slock o f pollutant
has to be deducted from the conventional NNP. The net additions to the stocks o f BO D , C O D , and
SS in the environmental media due to industrial pollution in India during the year 1997-98 are
estimated as 374,821.457, 1609,581.46, and 79,024.134 tons respectively as given in Table 7.
Table
6
provides monetary accounts o f industrial pollution in India. It provides estimates o f
monetar}’ values o f effluent loads, and load reduction required as per the standards. The monetary
I
value o f net additions to stocks o f B O D , CO D , and SS are estimated as R s. 74.626.584 million for
J
the year 1996-97, and Rs. S " .780.289 million for the year 1997-98 as reported in TablelO. The
estimates o f net national product (N N P) for India for the year 1996-97, and 1997-98 al l_?96-97
prices are given as R s 10.939.610 million and Rs. 11.731,393. The environmentally corrected NNP
for India, corrected for industrial pollution is estimated as P '
^4.626.584) m illion for the year 1996-97 and Rs. 11,643,6
million for the year 1997-98.
23
°®3.42 (R s. 10,939,610 ,731,393 - 87,780.289)
Table 5: IMiysical Accounts of W a t e r Pollution L o a d s for In d ia n In dus try
Physical Accounts
BOD
•
1996-97
r
1997-98
3.559,341.2
3,025,980.9
Turnover
27,170,803,344 31,9.59,937,281
Waste water volume
4.431.190.45
52,262,645.39
Influent Load
470.700.044
400,166.56
Effluent Load
51,791,945.34
44,031,023.88
Load reduced
81.511.368
95.8 78.58
Load as per the standards
Load reduction required as 318,655.192
374,621.457
per standards
1.
2.
3.
4.
5.
6.
7.
t
COD
1996-97
3,025,980.9
27,170.803,344
298,635,385.8
2.047,653.041
296,587,732.7
679,264.206
1,368,388.835
• SS
1997-98.
1996-97
3,559,341.2
3,025,980.9
31,959,937,281 27,170.803,344
351,272,948.3 431,724,215.7
2,408,572.98
338,889.884
348,864,375.4 431,385,325.8
798,991.518
271,707.36
1,609,581.46
67,182.522
1997-98
3,559,341.2
31,959.937,21
507,820,055.:
398.622.71
507,421,432.!
319,598.582
79,024.1345
l abtc 6: IMonetai y A ccounts ol W a ter Pollution L o a d s for In d ia n In d ustry (1996-97 prices)
Monetary Aecuuiils
BUD
COD
1666-67
1. I uriiovcr
2, Waste water
.1.
v d U iiiic
I'fllucMl Load
4. Load
reduction
icquired
J 667-98
1666-67
SS
1997-98
1996-97
1997-98
3,025,980.9
3,559,341.2
.^,()lS.6Kf).6
3,559.341 .2
3,025,980.9
27 .1 7 0 .S0 3 .3 4 4
31,656,93-7,28!
27,170,803,.344 31,959.937,281
27,170,803,344
31,959,937,281
.‘^.3 !S.2.‘'
6,255.651
103,657.3 I (i!
121,927.99
5,651.463
6,647.591
4,6811.4146
69,271.263
81,481.038
1,120.3626
1,317.838
1274.23ft
34386.052
4 0 446.948
4531.1006
5329,7538
as ■L.TM.656-4
3,559.341.2
per standartls
5. Load as per standards
I (tS 3.26-1
Ijible 7: Physical and IMonetai y A cco iin is of A d d itn m s to* S lo c k of PoMutnnls by Indian Industry
IMiysical Net A ddition to the Stock ol Pollutants
M onetary
Value
of
Net
Additiqii,
Pollutants (R s. niillions)
Poilutanl
J9 9 7 -M JX
BOD
COD
SS
A7.IS7.52M
_
2 0 9 0 -0 7 _
1997-98.-
37 4,8 2 1 .45 7
4 ,234.959'
4,981.414
_ l/ i0 9 ,^ 8 L 4 6 ^
69,271.263
81,481.Q37
79,024.. 134"
i ' 1 2 0 3 6 ^
74,626.584
1,317.538
87,780.289
to
Stock
of
10. Conclusion
Valuation o f environmental resources is needed for making investment decisions in the environmental
management, for designing environmental policy, and for measuring environnienlally corrected
national income. Waste disposal se n ’ices offered by the environmental media to the industry are
productive inputs along with the conventional inputs. Industry uses pollulion abatement technologies
comprising end o f pipe treatment, process chqiiges in production, and changes in the use o f inputs and
products forTeducing pollution loads as per the environmental regulation. Iii this type o f situation the
assumption o f free disposal o f pollution is not appropriate in describing the (e’chnologies o f Virms
generating pollulion. Fo r a firm having resource constraint, the reducliori leads to the reduction o f
production o f output. The description o f the lechnolog)' o f a polluting firm as one o f producing jo intly
good and bad outputs with Ihe weak disposabilit)' assumption make.s i! possible to account for the loss
in the production o f good output to reduce the bad output, pollution. The output distance function in
the theory o f production describes the technology o f a polluting finn in this way.
-
"T h e shadow pnces o f environmental resources are derived in a general framework o f overall planning
problem for the economy in which environmental inputs are productive inputs in the industry, use o f
environment by the industry affects the iitilii,- o f people, and industry' uses abatement technologies lo
reduce the pollution. Models for deriving shadow prices arc provided with aliemative specifications
about the technology' o f polluting fim is. It is shown that in case there is a fall in the env ironmental
quality with the economic development,.the defensive e.xpcnditures estimated at shadow prices have
to be deducted from N N P to arrive at EN N P.
Estimates o f shadow prices o f bad outputs or marginal costs o f pollution abatement are made for the
Indian industry. The prim ary data collected through two surveys o f the fim is dunnc t h e period
1994-95 to 2000-01 for a large number of polluting firms in t h e h i i i i a n mdusirv are used l o estimate
output distance functions. The surveys prov idc d e t a i l e d data o n w a i c r p o l h u i o i i w h i i e i h c d a t a for
air pollution is very limited due to a poor response f r o m t h e s u r v e y e d f i r m s ahom a i r pollution.
Therefore, the estimates ofshadow prices l o r i h r e c m a i u r v a ic r pt.l|^ll(,•lIU,^,
t, Q D .
aod .S.S iliat
are made using die estimates o f parameters o f output distance function are reliable estimates. A
large vanation in I h e shadow p r i c e s o f h a d o u t p u t s across t h e o b . s c r v a t i o n . s i.s a t t r i o u i a b l e t o i h c
variations in the degree o f compliance across ihe fim is
25
It is shown that the estimates o f shadow prices o f bad outputs made in this paper could be used fo
designing- pollutani-specific taxes to meet the prescribed standards, and the estimation o
environmentally-corrected N NP, adjusted for industrial pollution. The estimated marginal cost o
abatement functions for B O D , C O D , and SS have displayed the propern- o f raising marginal cos
with respect to reductions in effluenl concentrations. The estimated pollution taxes for making tl
firm s comply with the national standards o f 35me/l for B O D . 250mp/l for r O D
and inOmo/l fr
S S are Rs.'20,157, R s. 48,826, and R s. 21,444.
The estimates o f physical and monetary accounts o f industrial pollution in India given in this'papt
provide inputs for developing environmental and economic accounts using the United Nation
methodology o f integrated environmental and economic accounting. The monetary value o f nr
additions to stocks o f B O D , C O D , and S S are estimated a.s R s. 87,780.259 rniliion for the yea
1997-98. Given the estimate o f net national product (N N P ; for India for the year 1997-98 as R.'
11,731.393 m illion at 1996-97 prices, the environmentally-corrected NNP for India, corrected fo
industrial pollution is estimated as R s. 116,436,133 (11,731.393- 87,780.289) millions for the yea
1997-98.
■
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