Valuing environmental functions in developing countries - Springer Link

Biodiversity and Conservation 1, 34-50 (1992)

Valuing environmental functions in developing countries B R U C E A Y L W A R D * and E D W A R D B. BARBIER London Environmental Economics Centre, c/o lIED, 3 Endsleigh Street, London WCIH, UK

Received 4 July 1991; revised and accepted 21 September 1991

The interface between ecology and economics is the valuation of environmental goods, services and attributes. The total economic value of an ecosystem is derived by estimating monetary values for it's direct use, indirect use, option and non-use values. Recent advances have been made in the economic valuation of direct, option and non-use values. Much less attention has been paid to measuring the indirect use value provided by environmental functions. These values may be particularly significant in developing countries. This paper details the challenge presented by valuing environmental functions to ecologists and economists and synthesizes the methodological advances that have occurred. Using tropical forests, wetlands and biodiversity as illustrations, the application of this methodology to valuing the functions of complex natural systems is investigated and existing studies reviewed. Conclusions on further research are presented. Keywords: economic valuation; ecology; biological diversity; tropical forests; tropical wetlands

Introduction Ehrenfeld (1988) and other ecologists have long acknowledged the important role played by environmental functions in regulating natural processes essential to the survival of human civilization. Economists are increasingly recognizing that these environmental functions, or 'ecosystem services', support and protect economic activity and thus have an economic value. The valuation of environmental functions crosscuts many disciplines, but most of all it is a fertile pasture for economists and ecologists. For this reason, linking ecological concepts to economic concepts is an important prerequisite for undertaking a discussion intelligible to both disciplines. Following an elaboration of a possible conceptual bridge between ecology and economics, the paper introduces the concept of total economic value. Environmental functions that protect and support economic activity are categorized as having an indirect use value. This indirect value is distinguished from direct values and, preliminary evidence shows, can be of a sufficiently significant magnitude to merit further research and investigation. The methodologies for valuing environmental functions in developing countries may not always be the same as in developed countries. The use of willingness to pay measures such as hedonic pricing and contingent valuation may be superseded by more costeffective measures in developing countries. Unfortunately techniques based on damage and replacement costs provide only second- and third-best estimates of the benefits derived from these environmental functions. The results of such techniques must be *To whom correspondence should be addressed. 0960-3115 © 1992 Chapman & Hall

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Valuing environmental functions

interpreted with care. Additionally, caution must be used in avoiding the tendency to double-count economic benefits and to ignore tradeoffs betweeen the different values. Several case studies are presented from work undertaken on valuation of tropical wetlands, tropical forests and biological diversity. The evidence from these studies indicate that the methodologies can quantify the economic value of environmental functions. However, methodological problem areas must be explicitly recognized and assumptions clearly stated, in order to assure the credibility of the results. We conclude that additional research into the application of these methodologies in developing countries is warranted. Such research may prove a crucial factor in developing economic arguments for conservation and sustainable use of natural ecosystems.

Linking ecological and economic concepts Valuing environmental functions is essentially a matter of determining the connection between underlying ecosystem relationships and the overarching economic system. Valuation, then, is the interface between the disciplines of ecology and economics. Any discussion of the valuation of environmental functions provided by ecosystems must implicitly involve a conceptual linkage between ecology and economics. The conceptual exposition that follows makes such linkages explicit. Any system whether natural or manufactured is characterized by three concepts: stocks, flows and the organization of these stocks and flows. These three system concepts have parallel concepts in both ecology- structural components, environmental functions and diversity - and economics - goods, services and attributes. Table 1 summarizes the linkage between these system concepts and their ecological and economic counterparts. Watt (1973) defines five fundamental ecological variables that explain all ecological phenomena: matter, space, energy, time and diversity. These ecological variables are useful in explaining the relationships between the three ecological system concepts. 'Structural components' of ecosystems are species populations and non-living matter. Matter and space are the ecological variables necessary in composing such a 'stock concept'. The interaction of these structural components in conjunction with radiant energy from the sun produces 'environmental functions' including all manner of hydrological and nutrient cycling, energy flows and climate regulation. These ecological processes are 'flow concepts' demonstrating the change in stocks stimulated by energy flows over time. This interaction is determined by the diversity, or distribution of types

Table 1. Ecological and economic concepts compared. System concepts

Ecosystem concepts

Ecological variables

Economic concepts

Stocks

Structural components

Matter, space

Goods

Flows

Environmental functions

Time, energy

Services

Organization

Biological and cultural diversity

Diversity

Attributes

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of components and functions present in the system. 'Diversity' is the concept representing the organizational dimension of an ecosystem. Inquiry into the relationships amongst and between ecological components, functions and diversity is the domain of ecology. The discipline of economics enters the picture when the ecological components, functions or diversity contribute either positively or negatively to human welfare. When structural components of ecosystems are appropriated for use, e.g. wood for fuel, fish and meat for consumption, economists call them 'goods'. Environmental functions that produce benefit flows over time e.g. watershed protection by vegetation cover, sediment retention by marshes, nutrient cycling in soils provide economic 'services'. Goods and services are the tangible and intangible outputs respectively that through the economic process of production and consumption affect human welfare. 'Attributes', on the other hand, are not outputs per se, but indicate how goods and services (e.g. the components and functions of ecosystems) are organized. The attribute of diversity in ecological components, environmental functions, ecosystems and even culture may affect the value arising from these outputs into the economic system and thus impact on human welfare. Environmental functions

Indirect uses An accounting of the full range of ecosystem benefits accruing to society is essential for understanding the economic implications of alternative use or non-use options for the system. Measures of the total economic value of an ecosystem must specify the value of it's environmental goods, services and attributes (Barbier, 1989; Pearce et al., 1989). The use value derived from an ecosystem is typically categorized as either a direct or indirect use of the system's resources in consumptive or productive activities. Option values associated with the retention of the option for future uses are added in to obtain the total use value of the ecosystem. Value conferred by humans on the ecosystem without regard to their use of it make up the non-use values of the system. Existence values, the benefits derived by an individual from the mere knowledge that the resource exists, are one example of these non-use values. Thus the total economic value of an ecosystem is made up of its direct use value, indirect use value, option values and non-use values. Table 2 illustrates the connection between these values and the ecological components, functions and attributes in the case of a freshwater Guatemalan wetland. 'Direct use values' describe the benefits of the goods and services that enter directly into the human economy. Direct uses of ecosystems generally include the hunting, harvesting and gathering of various goods as well as the direct consumption of services such as recreation, tourism, research and human habitat. The estimation of these values, particularly those derived from the depletion and consumption of resource stocks, is a long-established area in resource economics. Even environmental functions that are directly used, such as water transport, prove easy to value in comparison to services that indirectly support and protect economic activity and hence human welfare. This particular subset of environmental functions are distinct from other functions that result in goods and services that are valued through their direct use. For environmental functions with indirect use values it is the process


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Table 2. Use of wetland characteristics: Petexbatun, Peten State, Guatemala. Characteristics

Direct

Indirect

Non-use

Components

Forest resources Wildlife resources Fisheries Forage resources Agricultural resources Water supply

xx x xx xx xx xxx

Functions

Groundwater recharge or discharge Flood and flow control Shoreline or bank stabilization Sediment retention Nutrient retention External support Recreation or tourism Water transport

X XXX XXX XXX X/XX XXX X XXX

Attributes

Biological diversity Uniqueness to culture or heritage

xx

xx

xx x

Key: x = low; xx = medium; xxx = high. Source: Barbier (1989). itself that provides economic value. Unfortunately, this contribution is unmarketed, goes financially unrewarded and is only indirectly connected to productive and consumptive activities. These indirect use values are very difficult to value. Given the traditional emphasis on valuing the structural components of ecosystems and the relative ease of valuing directly exchanged goods and services, it is not surprising that research into the valuation of environmental functions is only at a formative stage. This is particularly true in developing countries where data collection and analysis remain difficult tasks. Addressing this situation in developing countries is important because a much larger segment of the population depends on the natural resource base for their livelihood and survival than in the developed world. Valuation of the indirect support and protection provided by natural ecosystems for economic activity and property may prove to be a very powerful argument in favour of conserving these systems in developing countries. If economic arguments are to be used for considering conservation as a viable development option, then research into the valuation of indirect environmental functions is crucial. As environmental functions may have organizational attributes that impact on their value, e.g. changes in species diversity may impact on the amount of a supportive or protective service that is available, any consideration of indirect environmental functions should not overlook the role of diversity. Conservationists recommend measuring the value of biological diversity by estimating the value of the biological resource in an

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ecosystem (McNeely et al., 1990). This approach is contrasted with that arising from our conceptual definition of diversity. Rather than taking the value of environmental outputs as indicative of the value of diversity it makes more sense to value diversity as an economic attribute. This entails examining the impact of changes in diversity on the value of environmental outputs, whether they be goods or services. Research into the value of regulatory environmental functions must investigate the ecological linkages that relate changes in diversity (at the genetic, species or ecosystem level) to the continued support and protection of economic activity afforded by these functions. The role of

Summary of base case results (8% discount rate); Korup Project (Cameroon).

Table 3.

NPV (£ '000) -11 913

Direct costs

Total capital costs - excluding roads (1989-95) Total capital costs - roads Total long-term operating costs (post 1995) Labour credit

- 7 697 - 1 859 - 4 761 2 404 - 3 326

Opportunity costs

Lost stumpage value Lost forest use

-706 - 2 620 11 995

Direct benefits

Sustained forest use Replaced subsistence production Tourism Genetic value Watershed protection of fisheries Control of flood risk Soil fertility maintenance

3 291 977 1 360 481 3 776 1 578 532

Induced benefits

Agricultural productivity increase Induced forestry Induced cashcrops

4

Net benefit - Project

1 084

6 462

Adjustments

External trade credit Uncaptured genetic value Uncaptured watershed benefits Net benefit - Cameroon

Source: Ruitenbeek (1989).

328

905 207 3 216

7 246 -433 -351 7 546


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diversity is an issue of particular relevance in developing country research, as the major portion of the world's species diversity is found in tropical regions. Despite the difficult challenge face by ecologists and economists in valuing environmental functions in developing countries, evidence does exist of the important benefits provided by regulatory environmental functions. In a cost-benefit analysis of alternative land-uses of the Korup rain forest (in Cameroon), Ruitenbeek (1989) calculated the value of watershed protection in supporting inshore fisheries and providing flood control at over UK£ 5 million. This compares positively with the opportunity costs of the project of just over UK£ 3 million (Table 3). Magrath and Arens (1989) estimated the costs of off-site soil erosion in Java from siltation of irrigation systems, harbour dredging and reservoir sedimentation. The total damage costs came to US$ 58 million per annum in 1987 indicating that even the watershed protection supplied by agro-ecosystems have indirect benefits of a measurable magnitude (roughly 0.5% of agricultural gross national product (GNP)). Pearce (1990) has demonstrated the linkage between ecosystems and indirect uses on a global scale. Based on a global damage cost calculation for climate change of US$ 13 per tonne of carbon, Pearce estimates the indirect carbon credit due to a single hectare of conserved forest to be US$1300. These studies lend credence to the expectation that if the national and international indirect uses of managed and unmanaged natural systems were correctly valued, perceptions of the worth of such systems might be substantially altered. Irrespective of political constraints, this might enhance the chances for conservation of these ecosystems. Methodology: measurement of function value

The methodology for valuing the regulatory functions of ecosystems will differ depending on whether economic activity or property is being supported or protected. If economic activity is being supported, the indirect use value of environmental functions is always related to the change in value of production or consumption produced by an any alteration of the existing function. If such activity is being protected, the implicit suggestion is that changes to the function may result in a decrease, but not an increase, of the value derived from the function. In either case the theoretical measurement of function value relates to the consumer surplus, or willingness to pay (WTP), associated with the function in question. In selecting regulatory functions for valuation the key is to recognize that most of the indirect benefits of the environmental functions will actually occur off-site, at a distance from the ecosystem itself. This is best illustrated by a hypothetical example: Consider the value of the quantity and quality of water supplied by a natural riverine system and forest to a fish farm downstream. Assume competing uses and a rational, socially-minded water pricing policy by the local authority. In this case, the marginal product of the fish farm will be related to the marginal product of the various inputs including water. However, the marginal product of the water input to the fish farm is due, albeit indirectly, to the existence of ecological functions taking place in the natural riverine and forest systems. The forest upstream may provide watershed protection, thereby regulating the quantity of water flow. The water quantity may be regulated by the activities of plankton and other micro-organisms in the riverine system. Essentially,

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these environmental functions are serving as indirect, intermediate services to the final goods or service that is directly valued. As the case studies discussed below reveal, in many developing countries complex ecological interrelationships across economic and natural system boundaries mean off-site indirect uses are more the rule than the exception. Since most systems contain an endless variety of these interlinked and indirectly used functions, judgement must be exercised in selecting the most economically significant uses for valuation. Once external benefits have been credited to their initial source within the ecosystem concerned there is little advantage in further disaggregation. Placing a limit on how far back in space and time the analysis should extend simplifies the valuation task somewhat. This does not obviate the need for obtaining detailed specification of the ecological interrelationships involved in the relevant functions to be valued. While an ecologically-minded economist may easily spot the major use values, the specification of the functional interrelationships resulting in competing uses, synergistic uses or threshold effects is one of the areas requiring input from ecologists. Detailed and costly field work will still be necessary, but it basically calls for close collaboration between economists and ecologists. As noted above, actually determining the value of a regulatory environmental function requires assessing the WTP for the indirect protection or support services provided by that function. Since indirect services are not exchanged in the market place, considerable difficulty is encountered in estimating the willingness to pay for these services. Figure 1

Indirectly used (e.g. ecological functions)

Directly used (e.g. recreation or tourism, water transport)

r I

Actual expenditures

Reflect WTP

Do not reflect WTP a

use actual expenditure to value

use travel-cost, alternative or substitute cost approaches

Supports economic production

Use value of changes in productivity, alternative/substitute cost, WTP measures a

Protects economic activity or property

Use 3reventive expenditure, damage costs avoided, alternative or substitute cost, relocation costs approaches, WTP measures a

Figure 1. Valuing wetland functions. Willingness to pay (WTP) may be directly estimated through contingent valuation methods, hedonic prices, etc. Although these techniques might be less applicable to most tropical wetlands in developing countries. (Source: Barbier, 1989).


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uses the example of tropical wetlands to contrast the methodologies for valuing indirectly used regulatory environmental functions as opposed to directly used services provided by wetlands (e.g. water transport, recreation activities). Note that even for the regulatory functions the valuation approach may differ depending on whether the functions are supporting or protecting economic activity or property. Valuation techniques such as contingent valuation and hedonic pricing that are useful for estimating directly the willingness to pay for environmental goods and services in developed countries often prove more intractable in developing countries. However, the application of these more sophisticated techniques in developing countries is increasing. A recent study in Brazil (Briscoe et al., 1990) demonstrates how surveys of actual and hypothetical water-use practices can provide estimates of WTP that vary according to household socio-economic characteristics, qualitative differences in water supply and delivery systems. Direct estimation of the WTP for water use could be used to value environmental functions. For example, an important function of the Hadejia-Jama'are floodplain wetland (northern Nigeria) is to recharge the Chad Formation aquifer (Adams and Hollis, 1989). The groundwater in the aquifer is in turn drawn off by numerous small village wells for domestic use and agricultural activities. By combining hydrological information on the groundwater recharging supplied by the wetland, the impacts on the water tables supplying the wells and direct estimates of the WTP of villagers for the water, it might be possible to place a value on the groundwater recharge function provided by the Hadejia-Jama'are floodplain (Barbier et al., 1991). In the absence of time and resources to carry out detailed studies it may be necessary to indirectly estimate the benefits of environmental functions. For functions that support economic activity, alternative methods would be to value the changes in productivity resulting from support of that activity or the use of or alternatives or substitutes. For functions that protect economic activity or property, alternative valuation methods include costing damages avoided, alternative substitutes, investment expenditures on substitutes, relocation expenses and preventive expenditures. These techniques are second-best, and even third-best, methods of arriving at an estimate of WTP, but are often all that is available to the field researcher. In the case of the supportive role played by the groundwater recharge function of the Hadejia-Jama'are floodplain, it may be possible to obtain an estimate of the impact of additional water supply from the village aquifer wells on agricultural production. The changes in agricultural productivity associated with this water use could then be used to value the recharge function of the wetlands. However, more difficult to value through the changes in productivity approach would be the impact of groundwater recharge on domestic water use. Probably the most effective, second-best method of determining the value of protective environmental functions is to estimate the damage costs to the economic activity that are currently being avoided. If it is indeed possible to model the damage functions of the ecological interrelationships, the resulting damage costs give a reasonably accurate picture of the benefits of the service. For instance, contrasting a depletion scenario of increasing loss of groundwater storage versus a conservation scenario in which the recharging function is preserved may demonstrate the additional 'externality costs' caused l~y degradation of a recharge function. Munasinghe (1990) used this approach to provide a benchmark value for the damage costs of aquifer depletion in the Philippines.

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The main drawbacks of these second-best approaches is that they may require substantial field work, data analysis and modelling. It is also possible that the relevant ecological principles and mechanisms are themselves still under preliminary investigation and, therefore, subject to considerable dispute and scientific uncertainty. It is also possible that the extent of the damage costs will not be fully known until the protection function afforded by the natural ecosystem is completely lost - often irreversibly. A category of third-best alternative measures stem from the option of actively doing something about maintaining the service provided by the environmental function. Replacing the service is a relatively easy task if a product or technology that serves as a substitute for the indirect function is available. Using the WTP for the alternative or substitute service as an estimate of the value of the environmental function is valid provided: (1) the substitute can provide a similar service as the original function; (2) the chosen alternative is the least cost alternative; (3) the WTP indicates that the level of demand for services would be the same at the two different levels of cost (Turner, 1988). In the absence of ready substitutes it may be possible to cost out the investment necessary to develop a substitute or to reconstitute the function. Another possibility is to measure the costs of the alternative option of physically moving the economic activity or property. These relocation costs can then serve as an estimate of the °opportunity cost' of forgoing the protection function. The value of the environmental function may also be estimated by the actual expenditures required to prevent or avoid the environmental damage that would result in the absence of the function. For example, Magrath and Arens (1989) calculated the costs throughout Java of dredging harbours of sedimentation from degraded watersheds to be US$1.4-3.4 million annually. These preventive expenditures are one indication of the value of the sedimentation control function provided by well-maintained watersheds. Replacement cost and related methods of valuation must be treated with scepticism. The inherent contradiction in replacement costing is pointed out by Pearce (1990). The implicit assumption of replacement costing is that the replacement is worthwhile, that the benefits of the replacement exceed the costs of providing these benefits. However, this assumption is not consistent with the goal of reproducing the benefits provided by the original service and valuing them by using the costs of the replacement. The benefit : cost ratio for the replacement cannot be greater than one and also unity at the same time. A further difficulty is that the costs of the replacement usually exceed the willingness to pay for the original service. In practice it will be difficult to actually ascertain whether WTP is exceeded by estimates of replacement costs. One important point of reference, however, is that the replacement cost for an indirect service must be lower than the WTP for the direct use that the service supports. Finally, where qualitative attributes such as biological diversity impact on the value of environmental functions, it may be necessary to separate out the influence of diversity on the environmental service. This is difficult, but not impossible to quantify as the case study from Hogdson and Dixon (1988) reveals. Ecologists' measures of diversity in natural systems are crucial to this endeavour. Methodological pitfalls in measuring indirect use value

Although the results of separate valuations of distinct indirect services are usually aggregated along with other direct, option and existence values, Barbier (1989, 1991)


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and Pearce (1990) point out that trade-offs between the various component values of total economic value (TEV) can occur. An additional hazard in aggregating use and nonuse values into a net measure of TEV is the double-counting of benefits which can occur for both on-site and off-site indirect uses. An example of both on-site and off-site double-counting is provided by the nutrient retention function of a coastal wetland. Coastal wetlands often absorb organic nutrients from sewage and other waste emitted into waterways further upstream. Suppose that the nutrients held by the wetland are indirectly supporting both shrimp production within the wetland area and the growth of fish fry that supply an off-shore fishery. If the full value of the shrimp production is already accounted for as a direct use value of the wetland's resources, adding in the share of the nutrient retention service as an indirect value and aggregating to obtain TEV would double count this indirect use. In other words, the value of shrimp production already 'captures' the value-added contribution of nutrient retention. If instead one wanted to explicitly account for the value-added contribution to shrimp production of the nutrient retention function, then the direct value of the shrimp must be decreased to account for the economic return in value now attached to the nutrient retention service. Similarly, if the fish fry supported through nutrients retained in the wetland eventually migrate to an off-shore fishery, then the indirect contribution during the frys' stay in the wetland is included as on off-site component of the service's value. That is, the nutrient retention function of the wetland produces an 'external' benefit in terms of supporting an off-shore fishery. Again, care must be taken to adjust the value of harvested fish in any companion analysis of the adjoining fishery to avoid misrepresenting the total economic value of the wetland and the fishery taken together. An example of the double counting problem was recently encountered in an economic analysis of gum arabic cultivation systems in Sudan (Barbier, 1990). Gum arabic is produced from the Acacia senegal tree and can be a highly profitable cash crop. Small farmers in Sudan often cultivate gum arabic trees in scattered gum gardens or as part of a bush-fallow rotation with other crops. One reason for this practice is that the trees provide a variety of important environmental functions in addition to gum production, such as controlling soil erosion and runoff, nitrogen fixation, dune fixation, serving as wind breaks, and on a larger scale, controlling desertification. In the economic analysis, the net present value of the direct benefits of gum arabic production (including the use of the trees for fodder and fuelwood) were generally lower than the economic returns to the other major food and cash crops normally found in the cultivation system (sorghum, millet, groundnuts and sesame). One explanation was that in certain systems, particularly those involving a closely integrated rotation system or intercropping, higher yields and thus values of the annual crops were reflecting the valueadded benefits of the gum arabic trees' environmental functions. In other words, these benefits are in fact 'internalized' in terms of maintaining or enhancing the yields of the field crops within the systems. Trade-offs between the components of TEV can occur in one of two ways: either between direct and indirect use values or between indirect uses themselves. The use values of forest ecosystems provide a simple example. Suppose the forest's direct and indirect use values consist of timber, non-timber products and off-site watershed protection valued at $10 million, $5 million and $3 million respectively. If the full value of timber benefits can only be obtained through clean-cutting large tracts of forest land, adding

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these three figures to arrive at the total use value would then overstate the forest's value. Obtaining the timber benefits through complete harvesting of commercial species obviously involves a trade-off in lost value from non-timber goods and watershed protection services. It may also be the case that complete appropriation of the non-timber products is similarly inconsistent with obtaining the full indirect use value provided by watershed protection. As discussed by Rietbergen (1990), the record for harvesting non-timber forest products for commercial exploitation is not good, especially where harvesting is potentially destructive, such as in the case of tree barks, rattan and resins. Trade-offs between two or more indirect use values of a given ecosystem may also occur. For example, in addition to recharging groundwater the Hadejia-Jama'are floodplain in northern Nigeria discussed above also supports a number of important agricultural, forestry and fishing activities within the wetland area. However, concerns have recently been expressed about the excessive water use of some of these activities, especially pump-irrigated wheat production (Kimmage and Adams, 1990; Kimmage 1991). Increasing use of the floodplain water to support these activities may mean less water available for natural groundwater recharge. If there are trade-offs between these two environmental support functions, then adding the full value of the wetland's contribution to agricultural production to the full value of groundwater recharge would overestimate the total benefit of these two environmental functions. In sum, the problems posed by double counting and possible trade-offs need to be sorted out in any measurement of the indirect use values of' environmental functions. While it is necessary to disaggregate the goods, services and attributes of an ecosystem for valuation purposes any complementarity and substitutability of these services must be accounted for in arriving at either total indirect use or total use values. Otherwise these values may be grossly overstated.

Tropical wetlands Regulatory functions such as downstream flood control, groundwater recharge and sediment or nutrient retention are examples of ecological functions performed by wetlands that may indirectly benefit economic activity within, or outside of, the wetland area. Additional indirect benefits of wetlands are listed in Table 1. The methodologies for wetland assessments arc summarized in Fig. 1 and discussed above. Research on tropical wetlands in which indirect use values are calculated are rare or nonexistent. Barbier (1989) discusses approaches for incorporating a whole range of these environmental functions into the valuation process in the case of two wetlands in Central America. Further work on the Hadejia-Jama'are floodplain in northern Nigeria by Barbier et al. (1991) calculated the benefits of the direct uses of wetlands. Based simply on the uses of the floodplain for agricultural, fishing and fuelwood production the authors found that the wetland netted a higher economic return per meter of water than water developments being considered upstream. Adding in the indirect benefits of other environmental functions whose values do not overlap with those of the direct uses, such as household water use, non-timber forest products and other wildlife benefits would only serve to strengthen the case for conservation. In a 1989 study, Thomas et al. (1989) compared the benefits of using water for agricultural irrigation with the benefits of maintaining downstream riverine flows and


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wetland water uses in Tunisia's Ichkeul National Park. Although the study focused on the direct uses of the wetland for fisheries and grazing, it also identified and laid out the groundwork for valuing three regulatory functions of economic importance to the region: (1) the de-salinization of the water table; (2) sewage transport and treatment; (3) the wetland as a source of food for transient and overwintering bird species. Completion of the upstream dams for purposes of irrigation would lead to the loss of water table recharge and salinization of the water table. State farms and villages use the well water for both irrigation and home use. In the absence of continued water flow into the National Park, many villages and agricultural enterprises would face the choice of relocating or paying the costs of piping in fresh water. Thomas et al. (1989) cite a potential yearly rate of extraction of 17 million cubic meters of fresh water, but do not attempt to value the willingness to pay for this water or to cost out the alternative means of supplying such an amount of fresh water. The second regulatory function provided by the wetland is the recycling of sewage from the town of Mateur (Tunisia). This town is situated on the banks of the Oued Djoumine river which flows into the marshes of the Ichkeul National Park. Completion of the irrigation dam upstream will practically eliminate the flow of water through Mateur resulting in a localized sewage problem. Thomas et al. (1989) postulate that the indirect use value of the river and the marshes would be represented by the cost of a sewage treatment plant or by the decline in health and productivity if the sewage is left untreated. Thomas et al. (1989) also argue that the support of bird populations by the wetland prevents the increasing nuisance costs of birds feeding on farmland adjacent to the Lake Ichkeul marshes. Prospects for continued reduction in water flows to the National Park will likely result in additional degradation of the marshes. With over 120 000 birds visiting or overwintering on the marshes the reduction in feeding area and changes in species composition will impact heavily on agricultural production bordering on the National Park. In this case, the authors point out that the cost of reducing the protection service provided by the marshes to neighbouring farms could be measured in terms of lost production or the cost of preventing the birds from moving onto agricultural land in search of food.

Tropical forests Tropical forests also provide a wide range of regulatory functions that protect and support economic activity. Nutrient cycling, watershed protection, air pollution reduction, microclimatic functions and carbon storage are just a few of the functions providing services on local and international levels. Two examples of attempts to value the benefits associated with these regulatory functions are illustrative. The valuation of watershed protection functions of the rainforest for coastal fisheries and flood control in Korup National Park (Cameroon) by Ruitenbeek (1989) is representative of the calculation of off-site indirect benefits. Pearce (1990) demonstrates how the valuation of indirect benefits provided by tropical forests can include their role in carbon storage, thereby extending the analysis of forest functions to take into account indirect values at the global level. The purpose of Ruitenbeek's analysis (1989) is to compare the Korup protected area and related projects in terms of sustained forest and subsistence use, tourism, genetic

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value, protection of coastal fisheries, control of flooding and soil maintenance with the opportunity costs of forestry and other development options. Ruitenbeek actually calculates the indirect use values of the three regulatory functions: watershed protection for coastal fisheries and flood control, and soil fertility maintenance. The present value of the benefits of these three functions to £ 5.8 million or one-half of the total benefits from forest use (Table 3). These indirect use values indicate that the omission of indirect uses from the valuation process could heavily prejudice comparative analysis of the two land use options. The watershed protection functions of the Korup rainforest serve two important regulatory functions: flood control and maintenance of an on-shore fishery. Ruitenbeek calculates the value of both functions through the damage costs avoided approach. Using estimates for the share of local economic output likely to be lost by flooding and for the periodicity of major floods, Ruitenbeek concludes that the damage costs with full deforestation would be £ 1.57 million per year. Similarly, the value of maintaining the on-shore fishery is estimated to be worth £ 3.75 million per year. This is the total value of the fishery to Nigerian and Cameroonian fishermen adjusted for the proportionate contribution in terms of watershed protection provided by the Oban forest in neighbouring Nigeria. To obtain present value figures for the cost-benefit analysis the author adjusts these values according to the projections of logging activity scheduled to begin in the year 2010. The flood control benefits end up with a present value of £ 1.58 million and the fisheries maintenance (dropping out benefits to Nigerian fishermen) comes to £ 3.78 million. Ruitenbeek's work (1989) in valuing indirect uses of the Korup Forest is valiant and path-breaking. However, the ecological assumptions behind the damage cost methodology used in valuing the flood control function are not clear. On the other hand, he does employ a strong ecological assumption in valuing the watershed protection function for the coastal fishery. It is evident that Ruitenbeek considers the fishery to be a total loss if the Korup Forest is removed. The ecological substantiation of this implicit assumption is not presented by Ruitenbeck, nor in our opinion is it likely to be justified. Valuable though the watershed protection function may be, it is unlikely to be so essential that the entire fishery will be eliminated by the loss of this function. In fact it is probable that the low rates of deforestation projected by the cost-benefit scenario may have a proportionately smaller impact on the fishery than that implied by a more rapid rate. This points out that the rate of deforestation may be one factor determining the extent of the damage done to the fishery when the watershed protection function is fully destroyed. In addition, the rationale for assuming that the damage function produces linearly increasing costs to fishery production as the absolute area deforested increases is also questionable. Ruitenbeek assumes that the damage costs he calculates for total deforestation are divisible by segments corresponding to the proportionate size of the area deforested each year. It may be that the amount of deforestation and concurrent degradation of the protection function causes little damage up to some threshold amount of degradation at which considerable damage is incurred. A final point of criticism derives from Peace (1990) who cautions against assuming that deforestation itself leads to the loss of functions such as flood control or fishery maintenance. Instead it is the ensuing land-use that is all important in determining the extent of damage to the protection function. In his ecological analysis Ruitenbeek should specify what the ensuing use would be and how it impacts on watershed protection.

Valuing environmentalfunctions

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Pearce (1990) uses the linkage between the carbon storage of tropical forests and the greenhouse effect to show how the indirect uses of ecosystem functions to protect the global environment can be valued. Pearce first obtains an average figure for the carbon release of 100 tonnes per hectare of deforested land area. Then, using Nordhaus' estimate of $ 13 of damage per tonne of carbon released, Pearce concludes that the damage costs of deforestation and hence the indirect use value associated with the carbon storage function come to $1300 per hectare. While the end result relies on rough guesses about a very uncertain issue, notably the costs of global warming, the method employed indicates that it is theoretically possible to salvage the value of regulatory functions that provide global services. It even permits rough estimates of this value without recourse to site-specific ecological analysis, although comprehensive studies would probably find it desirable to calculate local rates of carbon release caused by deforestation.

Biological diversity The prevalent notion on the topic of valuing biological diversity, referred to earlier, is that such valuation is accomplished by estimating the benefits stemming from the sum total of an ecosystem's biological resources. Flint (1990) and Aylward (1991) contend that this line of thought has obscured the economic issues involved in valuing biological diversity. Instead, the attribute of biological diversity is likely to have its own direct use, indirect use, option and non-use values. When indirect use values of ecosystems are measured, the question relevant to biodiversity is the scale of the contribution made by the attribute of diversity to the support and protection afforded to economic activity by the relevant regulatory function. Hodgson and Dixon's (1988) cost-benefit analysis of fisheries and tourism versus logging activities in Bacuit Bay (Palawan, Philippines) provides an excellent example of the role of diversity in environmental functions. The ecological analysis traces the impact of sedimentation resulting from logging activities through to its specific impact on coral cover, coral diversity and fish production in the coastal area of Bacuit Bay. Hodgson and Dixon (1988) present their analysis as a comparison of the alternative uses of the terrestrial and marine areas within the Bacuit Bay system. However, it can easily be reinterpreted as a study of the land-use options for the forested area lying within the drainage basin of Bacuit Bay (note the similarity with Ruitenbeek (1989)). Under this scenario, the direct use values of fisheries and tourism undertaken in the Bay are protected from sediment pollution by the land-use option of banning logging of the forest area in the basin. According to Hodgson and Dixon, sedimentation of coastal waters could impact on the productivity of fisheries through three channels. Direct effects of sedimentation on fish such as gill clogging are discounted. Instead they detail two indirect linkages from sedimentation to fish production - one through coral cover and one through coral diversity. The dependence of fish on both coral cover and diversity establishes a potential link between forest degradation, ensuing sedimentation of coastal waters, changes in coral diversity and fish biomass (Fig. 2). Using regression analysis Hodgson and Dixon found that 100 x 106 km -z of annual sediment deposition led to one coral species extinction per year. This extinction was in turn correlated with a decrease in fish biomass of 0.8%. The negative impact of 400 x

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Direct Use Value of Species Diversity

HumanPreferences

FishSpecies

EcologicalInputsto / FishProduction CoralCover Indirect Use Value of Species Diversity CoralDiversity Figure 2. Direct and indirect use values of biodiversity. Source: Aylward(1991). 106 km -2 deposition per year on coral cover was calculated to cause a 2.4% decrease in fish biomass. Although the conclusions of the study did not break out the respective influences of coral cover and diversity on the lost value of fish production, the ecological analysis does clarify the role of species diversity in the indirect use value provided by the forest. This is in contrast to Ruitenbeek's (1989) study which not only leaves the ecological damage function implicit, but fails to consider the role of diversity in protection of coastal fisheries. If this role is not disaggregated, the impact of sedimentation on fish biomass is likely to be modelled directly and the differential value associated with the attribute of biological diversity overlooked as a consequence. It is also clear from this example that diversity can be responsible for value at many points in the generation of indirect use value. Further ecological investigation in the Bacuit Bay study might have found an additional diversity value associated with the impact of tree species diversity on soil retention in the watershed. While such disaggregation may not always yield the significant results reported by Hodgson and Dixon, the possibilities must be explored if anything is to be said about the importance of the role of diversity in contributing to the economic value of regulatory functions.

Conclusion

Directions for future research It is clear that the valuation of the economic contribution of regulatory environmental functions, particularly in developing countries, is an undertaking still in its infancy. Early efforts show definite promise that such research is worth pursuing. Findings to date indicate that the indirect benefits of these functions are of a magnitude that may even


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rival the direct benefits of sustainable use of natural systems. Continued research into the linkages between ecological functions and economic activity merits attention for its potential contribution to arguments for the sustainable use of natural ecosystems. Such research must focus not only on indirect benefits within the ecosystems under evaluation and in neighbouring areas, but it must also begin to make the connection between local ecosystems and global environmental quality. Such an effort requires the integrated application of ecology, economics and related natural and social science disciplines to identifying, modelling and valuing regulatory functions. It is too early yet to predict whether cookbook solutions, concentrated research, or some mixture of both will in the end be necessary. Only a concerted effort to undertake additional research followed by the gathering of this wider body of experience will point the way.

Acknowledgements This is a revised version of a paper presented at the 'International Workshop on Ecology and Economics' held by the Centro Agronomico Tropical de Investigacion Y Ensenanza in Turrialba, Costa Rica, 29-30 January 1991. The authors would like to thank the workshop participants, as well as Joshua Bishop and David Pearce for their helpful comments on the original version of the paper.

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