Valuing Natural Resources - Accounting for Change

Date: 01 Feb 2017
Donner une valeur à la biodiversité
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The need to preserve natural resources has made it necessary to invest them with economic value and include them as assets in national and international accounts. While this valuation system is highly complex due to the many stakeholders involved, it does have an impact on policy decisions.

Natural resources are capital assets that yield income over an extended period of time. Yet, unlike physical capital such as machinery, which is man-made, they are the product of natural processes occurring over a relatively long period. While machinery can be replaced immediately or fairly rapidly, natural resources take much longer to replenish themselves; very often, the natural process that generated them initially cannot be replicated. This raises the question of sustainable extraction, or the use of natural resources at a rate not greater than the rate of replenishment.

This, however, is a recent concern. Issues of sustainability have become more important over the last two decades, especially since the 1992 Rio Conference, at which the landmark Convention on Biological Diversity was signed. At this Conference, the local and global impact of the depletion of natural resources was acknowledged by developed and developing nations alike and the need to develop national strategies and programmes to handle this depletion was explicitly addressed. Indeed, the Convention led to the creation of the Global Environment Facility, a unique international financial mechanism, to contribute to national efforts for conserving the world's biological resources.

Valuing resources

As part of this broad global consensus on the need for judicious use of natural resources, it has been argued that while economies have experienced high growth rates at the cost of depleting some natural resources, conventional accounting systems have failed to record this. In response to this argument, a genuine savings indicator was developed by the World Bank in 1997, expanding the concept of national wealth to include assets (natural resources) and liabilities (pollution). In addition, a system of Integrated Environmental and Economic Accounting was proposed soon after the 1992 Rio Conference; this was effectively a framework for valuing environmental resources (and their depletion), using a methodology consistent with mainstream income accounting. The Millennium Ecosystem Assessment seeks to use economic valuation as a tool for decision-makers, enabling them better to understand changes in ecosystem goods and services associated with changes in management regimes. In other words, it lays emphasis on assessing the incremental (marginal) changes in the value of natural resources as a result of human actions or of policy interventions, rather that trying to assess the total value of the resource.

Such accounting systems are greatly hindered by inadequately developed techniques for valuing natural resources. Returns from physical capital are well-defined and directly monetisable, but returns from natural resources go to a very varied group of stakeholders; moreover many of these returns are in the nature of 'environmental assets' that rarely enter the market. For example, the value of forestland is generally globally underestimated because of its largely indirect value: In Norway, forestry (wood), pulp and paper, and sawn wood and wood-based industries account for a mere 1.1% of GDP; in Finland, agriculture, forestry, fishing and hunting account for 3.5% of GDP; in India forests are said to contribute about 1.2% to GDP according to the country's national accounting system, but again this figure does not include the considerable value of forest assets such as carbon sequestration, watershed functions, biodiversity and aesthetics. Valuing these assets properly would raise the figure substantially but, even though it is easy to recognize these values theoretically, putting estimated numbers to them is intensely controversial.

Political implications

The controversy is largely political. Ascribing greater value to such natural resources affects project planning decisions, like using forest land for non-forest purposes, or developing a large hydroelectric project with severe environmental and social consequences. Clearly, there could be trade-offs between competing national priorities, or between national and global priorities. For example, putting a high value on forests could influence decisions against using forest land for building a hydroelectric plant or some other infrastructure, and similarly it could influence decisions that favour keeping forest land to provide a habitat for endangered species.

Nevertheless, economists the world over have concentrated on the purely theoretical notion of the valuation of natural resources and a large number of indirect valuation methods are now being applied. In the case of environmental services, for which markets do not exist or exist very imperfectly, these methods rely on substituting products (a commercially available drug for a locally-used medicinal herb, for example) or the "willingness to pay" concept (the amounts spent by tourists for visiting a site of recreational value).

These exercises have led to unduly high estimates of the value of a particular resource. In India, for example, a 2002 government order required users to pay from INR 580,000 to INR 920,000 (between 8,930 and 14,150 euro) per hectare of forestland; in a sense, this approximates the value the government places on forest land being used for non-forest purposes. A series of monographs under the Green Accounting for Indian States Project (GAISP) has attempted to generate monetary accounts for various forest goods and services, expressing the value of depletion as a proportion of the Net Domestic Product (NDP). By this estimate, the total depletion on account of timber, fuelwood, carbon and non timber forest products amounts to 0.43% of NDP.

There are different reasons for valuing natural resources. At one level, the exercise establishes the concept that natural resources have far greater economic value than is reflected in income accounts. The effect of this could be to draw the attention of policy makers to the fact that the conservation and sustainable use of resources deserve greater attention both in terms of available funds and of strategies and action plans. Similarly, they help focus attention on losses to the economy as a result of depletion and degradation, and on ways of stopping these trends. At the micro level, they help us understand their importance to local livelihoods and local economic activities.

Of more current interest is the claim made by constituent units of a federation for payment in lieu of the natural resources they harbour. The argument here is that maintaining natural resources imposes constraints on local development options, while the benefits from them flow out to the entire economy. For example, in India, the mineral and forest-rich regions often suffer from poor socio-economic development while national economic growth is specifically fuelled by these resources. Similarly, whereas the development of hydroelectric potential contributes to national energy security, it imposes a range of social and environmental costs at the local level; this has led to the claim that the affected resources need to be valued and appropriate compensation paid through fiscal mechanisms.

In 2007, Germany and the European Commission launched the new initiative, The Economics of Ecosystems and Biodiversity (TEEB), to further better understanding of the economic value of the benefits provided by nature. This initiative will provide an opportunity to promote better accounting of natural resources at the international level. The process, similar to the role played by the Stern review over climate change, should be concluded in 2010.