Valuation is the process of determining the fair present value of any asset. Forest valuation means placing a value on forest products. Economic valuation is an important way of assigning quantitative values to the goods and services provided by forests.
It is used to assess the present and expected future economic importance of direct as well as indirect use values at the level of the forest.
Measures of economic valuation are based on people’s preferences and their willingness to pay for that service. The total economic value of a forest is the sum of all services that
flows at the current time, as well as those that may occur in the future.
Importance of forest valuation
- To determine the total economic value of forests.
- Planning process is influenced by economic analysis. Goods and services which have
quantities and prices can be taken into account in the decision-making process. - It helps to estimate the relative importance of various ecosystems.
- Provide the basis for policy formulation.
- To estimate environmental damage in the process of developmental works and take legal actions.
- Very important to make decisions in forest management and thus, improve the management of forest ecosystems and their services.
Common forest valuation techniques
The following techniques are used in forest valuation;
A. Using direct market prices for goods and services
This method is used for those products that are commercially traded. Prices are derived within the marketplace through interaction between consumers and producers over the demand and supply of goods and services.
It involves direct observation of market exchanges to determine the value in exchange of particular goods or services.
B. Using indirect market price techniques
1. Residual or derived price
In this method value of a particular good or service is estimated from the price of goods or services established later in the production or distribution process.
For example, the value of a good or service at the farm gate is at least equal to the residual value left after subtracting transportation, production, and distribution costs from market prices.
2. Surrogate market approach
In this method value of particular goods or services is estimated from the known values of substitute goods.
For example, the economic value of fuelwood can be estimated from the cost of alternative fuel, kerosene which would provide the same cooking or space heat.
3. Travel cost method
The travel cost method (TCM) is based on the idea that customers value a specific forest site’s experience at a level equal to or more than the cost of traveling there, which includes all direct transportation costs as well as the opportunity cost of the time spent getting there.
4. Hedonic pricing
This method estimates values from known values of other goods and services that are technically related to the goods or services to be valued. It is used for the property value approach and the wage differential approach, which are used to value environmental benefits and dis-amenities.
It assumes that the market value of land or labor is correlated with the flow of net benefits it generates.
5. Opportunity costs
This method estimates the value of opportunities forgone to provide a particular good or service. For example, if dung is used as fuel, the opportunity cost could be the decrease in crop yields caused by using the dung for fuel instead of as a means of fertilizer.
C. Non-market price technique
1. Contingent valuation
In this method, consumers are asked for their willingness to pay for any environmental benefits or alternatively, their willingness to accept cash compensation for losing the benefit in a hypothetical situation, and based on this the value of the environmental benefit is estimated. It is used to value wildlife and recreational benefits of protected areas.
2. Contingent ranking
In this method a survey is done asking respondents to rank a series of alternatuve non-market goods. The major advantage of this method is that monetary bids may or may not be used, as the use of CVM may be inappropriate in rural areas.
3. Choice experiments
In this method, respondents are asked to select from many alternative bundles of non-market commodities that are defined in terms of their characteristics, including a hypothetical price.
D. Production function approach
This method is also known as Change in production technique. This method is used to relate human well-being to a measurable change in the quality or quantity of a natural resource.
It measures the current level of productivity and estimates its level after the clear-cutting, and calculates the difference between these levels to derive the loss in productivity.
E. Cost-based approach
This method focus on the costs of providing, maintaining or restoring environmental goods or services.
1. Replacement cost methods
This method assumes that a good or service produced one way cannot have a economic benefit value higher than the cost of producing the same good or service in another way.
For example, value of a hectare of forest that is fixing carbon cannot be higher than the cost of some other means of fixing the same amount of carbon.
2. Preventive expenditure method
It estimates the cost of preventing or defending against degradation of the
environment.
For example, In the case of logging, the watershed protection benefits that might be diminished by constructing roads for the extraction of timber could be valued by examining the incremental cost of adopting less damaging extraction methods, such as non-mechanised extraction, or helicopter logging.
