UNIT 8 VALUATION OF ENVIRONMENT

Structure
8.0 Objectives
8.I Introduction
8.2 Importance of Valuation of Environment
8.3 Total Economic Value of Environment
8.4 ValuationTods
8.4.1 Market Prices
8.42 Shadow Prices
8.4.3 Hedonic Pricing Method
8.4.4 Travel Cost Method
8.4.5 Production Function Approach
8.4.6 Related Goods Approaches
8.4.7 Constructed Market Techniques
8.4.8 Cost-based Methods

8.5 Valuation of Environment in lndia

8.6 Let Us Sum Up

8.7 Key Words

8.8 Some Useful Books/References
8.9 Answem'Hintsto Check Your Progress Exercises

8.0 OBJECTIVES
After going through this Unit you would be in aposition to
explain theconcept of total economic value of environment;
distinguish betweenuse value and non-use value of environment;
explain various methods of estimation of the value of environment; and
appreciate the fact that environment is still under-valued.

8.1 INTRODUCTION
Environment plays an important role in an economy. First, it contributes to production
of output by supplying inputs shch as raw materials (minerals, crude oil, coal, forest
products, and many others), genetic resources, oxygen and water. Second, it regulates
climatic conditions through changes in the levels of carbon dioxide, solar energy,
moisture, soil fertility and erosion, etc.Thud, it provides avenues for many other activities
such as tourism and recreation. Fourth, it is a carrier of life on earth and provides habitat
for people. Fifth, it absorbs the wastage generated during production as well as
consumption of goods as a sink for effluents and emissions.

Over time there has been depletion of natural resources and degradation of environment.
which have adversely affected quality of life. Although its intensity differs across
geograpllical regions, and depends upon the level of economic development &d cultural
factors, the problem of environmental degradation has been witnessed everywhere at all
levels. A major reason behind environmental degmhon is the fact thatwe presume many
environmental hctions to be freely available to us and thus assign zero economic value.
A proper understandingof the value of environment would help in creation of awareness
among stakeholdersand allocation of adequate resources towards improvement in the
quality of environment.

8.2 IMPORTANCE OF VALUATION OF ENVIRONMENT

There are four distinct types of capital stock that contribute to economic development,
viz,.,man-made capital, human capital, social capital and natural capital. In traditional
parlance the input 'capital' is meant to be the man-made capital (also called physical
capital). In recent years a lot of research is being undertaken in measurement of the
contribution of 'social capital' (which is anthropogenic) and 'natural capital' (which
reflects the stock of natural resources) to economic development.
Keeping in view its durability and generation of a flow of valuable goods and services,
the stock of natural resources is termed natural capital. By putting in his labour, human
capital converts natural capital to m a n u f a c (physical)
~
capital. It is argued that perfect
and unlimited substitution between physical capital and natwal capital cannot take place
since manrnade capital cannot be created and sustained without the help of energy and
natural resources.
There are certain similarities between physical capital and natural capital. First, both
physical capital and natural capital are durable in nature in the sense that they do not
get exhausted in a single use. Rather they provide certain services (inputs), which depend
upoil the quantity and quality of capital stock. Second, depreciation to physical capital
accelerates if it is over-utilized. Similarly the stock of n a d capital is depleted faster
in case excessive resources are extracted from the environment.
Environnlent retains the capacity to regenerate itself in certain aspects and to some
extent. If extraction fiom the environment is within its regeneration capacity, there is
no depletion to the stock of natural capital. For example, if harvesting of forest products
fiom forests is less than its regeneration capacity, the quality of forests as well as the
area under forests will not be adversely affected, On the other hand, excessive
withdrawal of forest resources would result in a decline in supply of forest resources
available to the economy in the long run.In a similar manner, depletion in the stock of
natural capital in general would adversely affect the flow of environmental services.
It is often argued that over-exploitation takes place because stakeholders take into
account only private costs and benefits, that too for the current period, in decisionmaking and ignore the externalitiesand the long-term aspects. In such circumstances,
market forces cannot take care of environmental conservation because costs and benefits
of environmental degradation are not in the same hands. For example, a cement factory
in order to cut costs does not install pollution abatement technology and pollutes the
air in the locality. Thus the benefits accrue to the owner of the factory. However, the
cost of pollution is borne by inhabitants in the locality in terms of increased health
expenditure.

valuation of Environment

Sustainable Development
and Environment

Beneficiaries ofenvironment,households and firms, have a short-tern~parochial interest

where private costs and benefits are taken into account. Valuation of environtnent in a
social and long term penpective would help policy formulation to make the beneficiaries
pay for the cost. Thus it would help in internalizationof externalities.
In recent years attempts have been made to extend the product boundaries of
environment. Environmental functions which were ignored earlier on the ground
of being freely available have been given due recognition. It is difficult to assign
proper value to these functions as they are intangible in nature and do not have a
formal market. It has been emphasized in numerous studies that proper accounting
for environmental resources used up in economic activities is a difficult task. Lack
of a market for these resources, inappropriate policy measures to internalize the
externalities, and inadequate standards of measurement invariably results in undervaluation of environmental resources. However, proper valuation of environmental
resources by extending the traditional product boundary provides a better tool for
policy formulation and decision-making. It allows comparison of advantages and
disadvantages of alternative scenarios [Lettee and de Boo 20021.
In order to give due importance to environment, the stock of natural capital and its
quality is included while estimating the environment adjusted GDP (usually called
EDP, which is equivalent to GDP plus the value of environment). Whenever there
is depletion to the stock of natural capital or there is deterioration in its quality,
estimated EDP declines accordingly (see Unit 7). In order to estimate EDP it is
important to find out the total economic value (TEV) of environment. Valuation of
the resources provided by environment is considered to be a complex issue. The
problem comes up at two levels: identification of environmental functions and
assigning value to these functions. The problem of identification comes up, as it is
difficult to ascertain the uses to which the environment is subjected to. While some
of the environmental h c t i o n s are tangible in nature others are intangible. Moreover,
even though some of the functions can be identified it is dificult to assign values
to them.-In many cases the market for these functions are incomplete while in others
the market does not exist at all. The literature on total economic value of
environm&t is still blurred with ambiguity. However, in recent years many studies
have been undertaken to find out empirical methods of valuing environment.
Nonetheless it is still in a nascent stage and much abstraction and subjectivity
remains in the methodology, as we will see below.

8.3 TOTAL ECONOMIC VALUE OF ENVIRONMENT

As mentioned above it is difficult to identify and compile an inventory (or a complete
list) of environmental functions. The identification problem comes up because a
large array of functions emanating from environment is not marketed and thus
omitted in decision-making. Traditionally, as these goods and services do not enter
into formal markets, these are assumed to be either free or of little value. We will
try to explain the problem through an example - the value of quality air. Oxygen
contained in the air helps in sustenance of life for human beings and animals in
addition to being used in production of many commodities such as chemicals. We
breathe the air available to us in the atmosphere, for which no market exists in the
sense that there are no sellers and buyers and we do not have to pay for the air we
breathe. Moreover, there is little choice before us regarding the quality of air we breathe;
we as individualscannot buy better quality air for a higher price. The reason for such a
situation is the nonexcludability feature of air; once it is available in the atmosphere no
one can be excluded from breathing it. However, the quality of air deterioratesdue to

I
I

i
i
i

gaseous emissions from industries, transport vehicles and sewage. The quality of air
concerns us as there is a cost associated with the deterioration in its quality such as the
loss of productivity due to ill health, increase in health expenditure, and increase in the
probability of falling ill. Air pollution is an externality to the production process in an
industry or running a vehicle or dumping of household wastes as the cost of pollution is
not borne by the polluter. Pure air has an important function in the sense that it helps us
to stay tit. However, we presume air to be free good and ignore its value in decisionmaking. Aquestion arises: what is the value of pure air?As no market for air exists, it is
diflicult to find out. An indirect method of ascertaining the value of quality air could be
the total cost involved in the loss of productivity and health expenditure.You can find out
numerous examples similarto the above and appreciatethe value of various environmental
functions.
In Fig. 8.1 we present a detailed list of various aspects of environmental functions and
values ascribed to these functions.The total economicvalue of environmentarises primarily
because of its 'use values' and 'non-use values'. As its name suggests the use values
pertain to different uses to which the environment is subjectedto. On the other hand, the
non-use value relates to the psychological and ethical aspects associated with the
environment (for example, protection of endangered species, maintenance of habitat).
The use values are of three types: direct use value, indirect use value and option value.
The direct use value of environment is further sub-divided into two groups, viz., i)
consumptive or extmctive use value (e.g., commercial and domestic goods derived fiom
environment),and ii) nonansumptive use value (e.g., recreation, scienceand education).
Let us explain the distinction between the three categories - direct use, indirect use and
option values - with an example, say the value of forests. As we know, forests provide
us with timber and other minor forest products (such as seeds, leaves, etc.) which are of
direct economic use value - we know the purpose for which these products are used.
Thus it is easy to correlate certain environmental functions, which are of direct economic
use to economic activities. However, it is difficult to correlate certain environmental
functions with economicactivities, typically in the case of those pertaining to indirect use
values. Here the relationship between environmental function and economic activity is
round about. Continuing with the same example of forests, we can say that it helps in
maintaining moisture in the surrounding atmosphere which may not be of any direct use
to us. The moisture in the environment in turn helps in plant growthand thus agricultural
production is higher if moisture is maintained within a particular range.
?Re third categoryof use values, that is, option values of environmentpertain to the possible
use of the resources in future. Environment holds innumerablepossibilities in the sense
that certain resources may not be useful now but may increase production in future. For
example, current research in biotechnology and genetic engineeringhas combined strains
of different speciesto produce high yielding variety (HYV) seeds which are resistant to
pests. Another example could be the use of silicon chips in computer, a technology
unknown to us a few decades ago. Thus we do not know the value of certain functions
of environment, which only time can unfold.
?he non-use value of the environment is divided into two categories:bequest value and
existence value. Beques$value of the environment relates to the ideathat the environment
should be passed on to future generations so that they can derive both use and non-use
values from it. It is important since many ~cologicalchanges taking place due to
technological progress and economic development are irreversible.Many species, both
animals and plants (for example, indigenous varieties of rice and other crops) have got
extinguished fiom earth in the course of time. It is therefore desirable that biodiversitybe
maintained on earth. The second category, that is, existence values depict the fact that

Valuation of Environment

sustainable Development
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individualsassign importance to the existenceofnatural beauty even though it may not

be of any economic use to them. The very existence of forests,water streams, sea coasts
parks, etc. are important to individuals even though they may never use it in their lifetime.
We have presented a list of environmentalfunctions under different categories in Fig. 8.1
which is a modified version of the one suggested by Munasinghe (1992).You are expected
to appreciatethe importance of each of these functions and provide concrete examples
under each head. We make the observation that the categoriesmentioned in Fig. 8.I are
arranged in such a manner that as we move fiom left to right, the tangibility of the group
declines. Thus indirect use value is less tangible in nature than direct use value, while option
value is less tangible than indirect use value.

I
Total economic value

Use values

Non-use values

Option v s l u a

Bequest values

values

lndirtrt use
values

I
Outputs that
can be
consumed
directly

Benefits
accruing
indirectly to
users

I
Future direct
and indirect use
values

Direct use

C
Valuc of
fi~nctions
relaled to.
* Food
* Biomass
* Recreation
* Health

I
Existence

values

4
Values of
functions
related to:
* Ecological
functions
* Flood
control
* Rccrcation
* Flealtl\

4
Values of
funct~ons
related to:
'Riodivmity

'Consewed
habilars

I
Value of
leaving use and
non-use values
for offspring

Values of
functions
related to:
* Habitats
* Irreversible

I
The value
placcd by nonllsers on natural
asset for the
fact that
something
exists

4
Values of
functions
related to:
*Habit&
*Endangered
Species

(Decreasing tangibility of value to individuals o r specific groups)

Fig. 8.1 :Total Economic Value of Nature
(Source: Munansinghe, 1992, adapted)

lt is worth mentioning that the impact of certain envitonrnentalfunctions is local in nature

while others can percolate to national and international levels in geographical terms and
even to future generations o v a time. For example, moisture regulation due to a watershed
is local in nature. But the benefits of carbon sequestration cross local boundaries as it
reduces global warming. Thus forest areas in a country is valuable not only for the country
itself but for other countriesalso. Similarly the benefits of forests as a habi tat for genetic
resources could be of immense value for future, much beyond the comprehensiotl o f
current generation. Thus the question of stakeholders to environment comes up here.
Usually it is the local government which pays for the maintenance of forestswhile its bene1it
is shared, althoughto a limited extent, at the national and international levels. Should not
the international organizations pay for the maintenance of forest areas in developing
countries?This partly explains(apart i h m humanitarian reasons) the interest afforestation
programmes generates globally and grantslsofi-term-loansthe developing countries
receive h m developed cowntries and international organisations.
Environment is undervalued as we usually take into account those functions of the
environmentwhich enter into formal markets such as raw materials. This results in gmsq

under-estimationof the value of environment. We should appreciate that the indirect use
values. option values and non-use values, although intangible in nature, are also important.
Some ofthc empirical studies (for example,Adger et al. 1995; Furst et al. 2000) have
ibund that indirect use values and non-use values constitute large portions ofthe total
econoinic value of forests.

Check Your Progress 1

1)

Why is environment undervalued?

2)

What do you mean by total economic value of environment?

3)

Illustrate the difference between direct use value and indirect use value of
environment with an example.

8.4 VALUATION TOOLS

Valuation of various environmental functions needs identification of appropriate
valuation tools. Existing literature suggests a number of valuation tools for
environmental resources. Some researchers have attempted to categorise these tools
into different types. However, we desist from such categorization as no standard
classification exists as of now. Rather we present eight commonly used valuation
tools. These are (i) market prices, (ii) efficiency or shadow'prices, (iii) hedonic
pricing method, (iv) travel cost method, (v) production function method, (vi) 'related
goods approaches' such as barter exchange, direct substitutes and indirect
substitutes, (vii) 'constructed market techniques' such as contingent valuation and

valuation of E n v i ~ ~ m e n t

sllstainahlc i)e~elopment
and Envil-anrnent

contingent tanking, and (viii) 'cost based valuation methods' such as indirect opportunity
cost, restoration cost, replacement cost, relocation cost and preventive expenditure. Of
these methods, market prices and shadow prices deal with natural resources which are
marketed while the remaining methods are used in cases where no formal market exists.
Table 8.1: Forest Functionsand Relevant Valuation Tools
Use Value

Non-Use Value

I . Direct use value

2. Indirect
use value

3. Opt ion
value

4. Bequest
value

5.Existence
value

Wood products
(timber, fuel)

Watershed
protection
Nutrient
cycling

Possible
future Uses of
goods and
services
mentioned in
1 and 2 (use
values) by
the offspring
of actual
stakeholders

Bio-diversity

Non-wood
products(food,
medicine,
genetic material)

Possible
future uses of
goods and
services
mentioned in 1
and 2 (use
values) by
actual
stakeholders

Air pollution
reduction

Educational,
recreational and
cultural uses

Micro-climatic
regulation

Human habitat

Carbon storage

Culture.
heritage
Benefits to
stakeholders of
only knowing
of the existence
of goods and
services
without
using them

Valuation Tools
Marketing
analysis

Restoration
cost

Related goods
approach

Preventive
expenditure

Travel cost
method

Production
function
approach

Contingent
valuation
method

Contingent
valuation
method

Contingent
valuation
method

Contingent
valuation
method

Replacement
cost

Hedonic pricing
Source: Lette and de Boo 2002; Barbier 1991

For the different environmentalfunctions mentioned in Fig. 8.1, sugested valuation tools
are given in Table 8.1. The discussion of these methods given below is based to soiile
extent on Lette and de Boo (2002).

8.4.1 Market Prices

valuation at market prices can be applied for natural resourceswhich are marked. Market
price, as you know, is realized when demand for a product equals its supply. Since it is
determinedas a result of interactionbetween numerous buyers and sellers, it is considered
to be a sort of equilibrium price. The advantage with market price is that it is easy to
obtain and it reflects the willingness to pay of people. Thus it is quite acceptable to people
as a value of the product under consideration. However, in many instances there are
distortionsto the market price and it does not reflect true economic value of a commodity
and thus allocation of resources on the basis of market prices does not represent economic
efficiency in utilization of resources. These distorting factors could be taxes imposed and
subsidies provided by the government, for example, Subsidies on fertilizer. reduce its

price than what would have been. Thus the market price of fertilizer is less than its true
economic value and induces farmers to buy more of it. A second source of distortion to
market price could arise due to fixation of exchange rate, p&icularly for commodities
traded internationally.
Many of the environmental resources do not enter the market in the sense that these are
not traded at all. In such cases valuation of these resources at market prices is not possible
and we have to look for alternative valuation tools. Secondly, many environmental
resources are traded in the market but do not reflect true economic value of the product
due to taxes and subsidies. Thirdly, property rights for natural resources in most of the
cases lies with the government. But unauthorized selling of minerals, forest products, hide
and horns of animals, etc. is rampant in many countriesincludingIndia. In such cases the
seller does not bear the cost of production of the product and therefore can afford to sell
it much cheaper.

8.4.2 Shadow Prices

As mentioned above market prices do not represent true economic value of a product
due to market failure and policy failure. Market failure means the inability of the
market mechanism, under certain circumstances, to reflect accurately the value of
the environmental goods and services. Policy failure occurs when a particular
government policy has unintended side effects or cause inefficient resource use.
For example, some of the state governments in India in the past have followed a
policy of subsidizing minor irrigation through tube wells in order to increase food
grains production. The concessions offered to farmers in terms of lower interest
rate and cash subsidies provided the right incentives for farmers to go for more
and more nymber of deep tube wells which increased irrigation facility. The
unintended environmental impact, however, was the change in cropping pattern in
favour of water-intensive crops, the excessive depletion of underground water
resources, and the lowering of water table, which dried up shallow tube wells and
resulted in overall water shortage.

A limitation of the use of market prices is that although it reflects the cost of
production of the goods or services to the individuals (that is, private cost), it does
not take into account social cost. For example, the pricing of cement takes into
account the production cost to the producer only. It does not consider the increased
health cost of residents in the locality. Use of shadow prices rectifies this shortfall
by taking into account the societal impact of the production of the commodity or
service.
A limitation of the shadow prices method is that it may be biased, as the estimation
procedure may be imperfect. Moreover, it may suffer from personal bias of the
researcher or the decision-maker.

8.4.3 Hedonic Pricing Method

This method is used for valuation of non-marketed goods and services. In this
method we decompose the price of a commodity into the prices of its components
or attributes. For greater clarity we explain this method with an example of housing
prices. It is observed that the price of a house in an urban setting is ascribed to availability
of various amenities such as open space, lower noise and congestion, and proximity to
parks apart from the structure and size of the house. A house with better environmental
amenities(other aspects such asproximity to public school, availability of public bansport,
police protection, decent neighborhood,etc. remaining similar) usually fetches a higher

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Sustainable Development
and Environment

price than one located in a polluted environ. Thus the difference in the price of the two
houses can be considered as the willingness to pay for better quality environment.
This method needs to be used with caution as it is difficult to keep certain variables
unchanged (in the above example, size of house and similarity of non-environmental
factors) while changing environmental attributes. Secondly, much subjectivity is
involved in the decomposition of the attributes, measurement of these attributes,
and precise valuation these attributes. Thirdly, data requirement is enormous in the
case of hedonic pricing method which hinders its applications.

8.4.4 Travel Cost Method

This method assumes that the consumer is willing to incur substantial cost (in terms
of time or money) to procure certain environmental goods or services. It has been
widely used in developed countries to measure the value of recreational facilities.
The value of the environmental service, in this case, is equal to the opportunity
cost of time spent and the travel cost incurred by the visitors.

8.4.5 Production Function Approach

The production function approach is applied to estimate the indirect use value of
the environment. It consists of two steps: first, establish a relationship between the
environmental inputlservice and the output, and second, estimate the monetary value
of the environmental function. For example, soil erosion upstream causes siltation
in canals, which reduces the flow of irrigation water. As a result of decrease in water
supply, there is a decline in crop production downstream. In order to measure the
cost of soil erosion we estimate the crop loss due to siltation and find out its value
m money terms, which can be considered as an estimate of the cost of soil erosion.

8.4.6 Related Goods Approaches

There are three similar methods under this category, viz., barter exchange approach,
direct substitute approach, and indirect substitute approach. Here a non-marketed
environmental good or service is related to a marketed good or service.
a)

Barter Exchange Approach: some of the forest products such as wild fruits
and vegetables are not sold in formal markets. Some of these goods, however, may
be exchangedon anoncommercial basis for goods which are available in the market.
The unit of exchange between the two can be used to valuate the forest product.
For example, lea@vegetables are collected from forest by villagersresiding in 6inge
areas, which are used for self-consumption.Since these vegetables are not marketed
it is not possible to find out their market prices. However, if these vegetables are
regularly exchanged for some other commodity, say paddy, then the unit of exchange
between lea@vegetable and paddy can be found out. The market price of paddy in
this case could be used to find the value of the leafj vegetables under considemtion.

b)

Direct SubstituteApproach: In this case the value of a similar good is used for
valuation of the natural resource. For example, the value of he1 wood collected by
villagers fiom the nearby forests. Here a close substitute would be firel wood bought
fiom the market or even the value of kerosene or charcoal equivalent to the fuel
wood collected. The accuracy of this method depends upon the extent to which the
natural resource and the marketed product used as substitute are similar. The
limitations of market prices discussed in Sub-section8.4.1 apply in this case also.

c)

Indirect SubstituteAppmach: In many cases it is difficult to find a direct substitute.

which enters into formal market, for the environmental b c t i o n to be valuated. In

such cases we combine the production function approach with the direct substitute
approach. First, we find a direct substitute of the environmental function. Second,
we find out the value of this direct substitutethroughthe production functionapproach
discussed earlier.Thus we find out the value of the environmental function indirectly
through the production function approach. The indirect substituteapproach is based
on stringent assumptions about the substitutabilitybetween the two goods, the role
of the substitute good as an input in the production of the output, and the value of
the output.

8.4.7 Constructed Market Techniques

In many cases where environmental goods and servicesdo not enter formal markets we
construct a hypothetical market for the purpose of valuation ofthe environmental function.
There are two methods under this category which we discuss below.
a)

ContingentValuation Method:In this method we construct a hypothetical market

for a particular environmental function. This is an interview-based method where
respondentsare asked their willingness-to-pay (in monetary terms) for continuation
of the environn-lentalfunction.Alternatively some studies measure the willingnessto-accept for foregoing the environmental function. Here the consumers are
compensated for the change in the environmental service. There are certain
conceptual problems associated with this method. First, the willingnessto pay should
not be taken as the willingness to accept; usually the latter is higher than the former.
Moreover, both these terms do not imply the same property rights. Secondly, the
persons interviewed are hypothetical consumers. They may not be aware of the
benefits of the environmental function. Ifthey were actually asked to make payment,
their behaviour would be diEerent. Thus it is sensitive to numerous biases in survey
design and implementation.
In recent years this method has become quite popular. In Indian situationsthis method
has been applied by Hadker et al. (1997) for measurement of recreational and
educatioilal value of Borivli National Park in Mumbai, by James and by Murty
(1998) for the cost of water pollution of the river Ganga, and by Murty and Menkhaus
(1994) for valuation of ecotourism in Koladeo national park.

b)

Contingent Ranking Method:This again is an interview-basedmethod. It differs

from the contingent valuation method in that it does not ask respondents to put a
monetary value on an environmental function.Rather it asks the respondents to rank
a few amenities. Ofthese amenities, one is viewed as anchor or benchmark against
which others are compared.

8.4.8 Cost-based Methods

There are five cost-based valuation tools. These tools take the cost of maintenance of
the environmental function as its value.
a)

Indirect Opportunity Cost:This method is used when individual labour is involved

in harvesting or collecting the natural resource. A basic assumption is that capital
requirement for such ajob is minimal. For example, for gathering&el wood in forests
individuals need to spend time and do not need much capital. The opportunity cost
of such time spent could be considered as the value of the environmental resource
under consideration. The pitfall of this method is that the value of environment
obtained bears no relationshipwith its cost of production. The value of fuel wood,
if taken to be its gathering cost only, then it assumes that cost of production of he1
wood is zero. Secondly, in many cases &el wood gathering is a subsidiary activity;

Valuation of Envimnment

Sustainable Development
and Environment

farmers on their way back home may collect some fuel wood. In such cases it
involvesjoint production (farm output and he1 wood) and separating labour cost of
he1 wood is arbitrary.
b)

Restoration Cost: The restoration cost technique takes into account the cost of
recreating the ecosystem. For example, degradation of forests results in a reduced
flow of forest products and other functions. In order to restore the flow government
intervention (in terms of policy implementation and afforestation) is required.
According to the restoration cost method, the value of forest functions is its restoration
or recreation cost.

c)

Replacement Cost: This method takes the value of ecological functions as the
recreation cost of these ecological functions through man-made production
processes. It assumes that the benefits.providedby an intact ecosystem can be
measured and there are alternatives available to provide such benefits.

d) Relocation Cost: This method is applicable in situations where natural

environment in a particular area is put to some alternative use. For example,
the cost of establishing a new protected forest area. In this method, the flow
of ecological functions is maintained as in restoration cost and replacement
cost techniques. The difference, however, is that instead of recreating ecological
functions in the vicinity, the inhabitants are moved to a different locality.
e)

Preventive Expenditure: In this method the value of environmental benefit

is taken to be the cost of mitigating the adverse impact of environmental
degradation. We can cite several examples to explain the method: Farmers often
increase the use of inputs (fertilizer, pesticides, seed, etc.) to neutralize the effect
of falling land productivity. In order to avoid cough, breathlessness or irritation
in the eye residents in an industrial area may take regular medicines. The
expenditure on such counts can be added to obtain the total preventive cost,
which will provide an estimate of the value of environment.

Given the nature of problems encountered and the enormous task involved few
researchers have attempted to consider a comprehensive study on environmental
functions. Usually studies have considered a particular environmental function (or
a few of these functions) or a particular geographical area. Moreover, for valuation
of a particular function there could be more than one valuation tools. The use of a
technique (or a combination of these techniques) depends upon the nature of the
problem apart from its objectives and the convenience of,the researcher.

8.5

VALUATION OF ENVIRONMENT IN INDIA

In recent years a large number of studies have come up on valuation of environment

in India. Most of these studies have a limited coverage in terms of geographical
area and environmental functions. On the other hand, a few studies have attempted
to take a broader area and environmental aspects. We will give an overview of these
studies.
As you know, environment provides a wide range of functions, many of which are
intangible in nature. However, some functions are tangible in nature and traditionally
included in the gross domesticproduct (GDP). The Central StatisticalOrganisation (CSC))
estimates GDP every year (on a quarterly basis) and contribution of various sectors are
e&nated. It is difficult to identifl the contributionof environment to GDP as per traditional
approach as several sectors of the economy draw resources from nature.
Notwithstanding the contribution of other sectors, we point out two prominent ones, viz.:
i) mining and quanying, and ii) forestry. The mining and quarrying sector deals with the

extractionof raw materials. The GDP originatingfrom the mining sector is the gross value
added to the resources available naturally. Although it contributes about 2 per cent of
GDP, it is an underestimate of its true economic value as the availability ofnaturalresomxs
is assumed to be free of cost and only extraction cost is taken into account. Regarding
the estimation of contribution of forestry sector to GDP, the CSO in its publication
'National Account Statistics: Sources and Methods' (1989) describes the method of
estimation in detail. While estimatinggross output originating fiom forestry and logging in
India the economic inputs considered are i) forestry (e.g., planting and conservation of
forests. gathering of forest products, chircoal burning carried out in the forests),ii) logging
(e.g., felling and rough cutting of trees, hewing or rough shaping of poles, block, etc.)
and transportation of forest products to the sale depotdassemblycenters,and iii) farmyard
wood (industrial wood and fuel-wood collected by the primary producers from trees
outside regularbrests).
According to the C S 0 (1 989) the statistics on major forest products are completely
available but that on minor forest products are generally not satisfactory primarily due to
substantial unrecorded exploitationof forest resources apart from authorized production
by the right holders. The unrecorded production comprises of i) authorized (but
unrecorded) and unauthorized removals of timber and firewood h m reservedlprotected
forest land, and ii) unrecorded production fiom private owned forests and non-traditional
forest areas (e.g.,trees in village commons, field ridges, canal sides, road sides, fruit trees
no longer productive, etc.). The CSO estimates the unrecorded production as a
percentage of recorded production. The unrecorded segment in production of industrial
wood is quite low (e.g., 2.5 per cent in Himachal Pradesh and 5 per cent inTamil Nadu).
However, in the case of fuel wood, the value of unrecorded production to recorded
production is quite high (e.g., 20 times in Jarnmu and Kashmir, 17 times in Himachal
Pradesh). After taking into account results of various studies the CSO recommends that
the value of unrecorded production to recorded production be taken as 10 times in the
case of fuel wood and 10per cent in the case of industrial wood. The output of farmyard
wood is not included in the forestry sector.
The estimation of output originating from nature, however, is limited to marketable and
tangible products only. Keeping in view the fact that such a definition of the value of
environment is too narrow some studies have attempted to extend the product boundary.
In a micro-study Hadker et a1 (1997) have estimated the recreational and educational
value of a local park in Mumbai through contingent valuation method. At the state level
Ilaripriya (2000) has estimated the carbon sequestration function of forests in
Maharashtra. On the whole, the studies are limited in their approach and coverage, and
a lot has to be done to arrive at a proper value of environment in India.

Check Your Progress 2

1)

Explain the contingent valuation method of valuing environment.

Valuation of Envimnment

Sustainable Development
and Environment

2) Suppose you have to estimate the total economic value of a watershed near your
village. What are the functionsof the w~tershedthat you would.include? How would
you ineasure the value of these fimctions?

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3)

Explain the cost-based methods of valuation of environment.

8.6 LET US SUM UP

Environment has a vast ?my of functionsout of which some are assumed to have a zero
economic value, as these are available freeto us. Some of these functions are non-tangible
in natdk and 11otmarketable. However, these functions have important role in our
production and consumptionactivities.As the value of all the functions are not taken
into account in decision-making environment is always undervalued.
In recent years researchers have attempted to expand the product boundary ol'
environment by considering the value of more and more functions of the
environment. The problem however lies at two stages: identification of
environmental functions, and valuation of these functions.
Existing literature on environmental valuation provides a wide range of valuation
tools, which we have discussed in this unit. The measurement procedures are quite
different and are suitable for different functions and circumstances. While applying
these tech;liques the appropriateness of these tools should be carefully judged.
In India in recent years a lot of studies have been undertaken on valuation of different
aspects of environment. Most of these studies are microscopic in the sense that they
consider a small geographical area. However, a few studies have extended the
product boundary and considered the economic value of certain environmental
aspects of the whole country.

8.7 KEY WORDS

Carbon sequestration: The value of carbon sequestration function of foresls is estimated
by going through the following steps: i) estimate the bio-mass stocked in a forest area ii)
estimate the change in stock (= regeneration - depletion) over a year, ii) estimate the
carbon stock in such wood mass, ii) assume a standard price of carbon per ton of weight.
and iv) estimate the value of the annual change in carbon stock in the forest area.

Market failure: 'l'he price determined by interaction of supply and demand does not
reilect true economic value of a product. Taxes, subsidies and other regulations hinder
reali~ationof a market price based on economic efficiency.
Policy failure: It refers to the unintended adverse effects of government policy. For
example, a policy to promote minor irrigation may result in depletion of water table.
Stakeholders: It implies interests groups, which can be divided into various categories
such as local, national and international.Also stakeholders can be seen as intergenerational
groups such as current generation and future generation. As natural capital is limited,
interests of various stakeholdersofien conflict with one another.
Social capital: It is sometimes called moral capital and refers to the stock of community
resources. It is reflected in religious, ehcal, social and cultural interactionsin a community,
which results in a rise in the collective social well-being.
Human capital: It is the collective human knowledge, skill and intellect. Together with
social capital, human capital forms the interface between man-made capital and natural
capital.

8.8 SOME USEFUL BOOKS/REFERENCES

Adger. W. N. et al, 1995, 'Total Economic Value of Forests in Mexico', Ambio, vol.
24, no. 5, pp. 286-296.
Bateman, I. J., 1993, 'Valuation of the Environment, Methods and Techniques: Revealed
Preference Methods', in Turner, R. K. (ed.), Sustainable Environmental
Economics and Management: Principles und Practice, Be1haven Press, London.
Cropper. A. I.. and W. E. Oates, 2001, 'Measuring the Benefits and Costs of Pollution
Control', in Sankar, U. (ed.), Environmental Economics, Oxford University
Press, New Delhi.
CSO, 1989, National Accounts Statistics: Sources and Methods, Government of
India, New Delhi.
Furts. E. et al., 2000, 'Total Economic Value of Forests in Mexico', in McCracken,
J. R. and H. Abaza (eds.), Environmental Valuation: A Worldwide Compendium
of Case Studies, Earthscan, London.
Hadker, N. et al., 1997, 'Willingness to Pay for Borivli National Park: Evidence
from a Contingent Valuation, Ecologicul Ecorromics, vol. 2 I , pp. 105-22.
llaripriya, G.S., 2000, 'Integrating Forest Resources into the System of National
Accounts in Maharashtra', Environment and Development Economics, vol. 5,
pp. 143-156.
Lette and de Boo, 2002, Economic Valuation of Forests and Nature: A Support Tool
for Decision-Making, Theme Studies Series 6, InternationalAgricultural Centre,
Wageningen, The Netherlands.

Valuation of E ~ v i ~ o n m e n t

Sustainable Development

and Enviror~ment

8.9 ANSWERSIHINTS TO CHECK YOUR PROGRESS

EXERCISES
Check Your Progress 1
1)

Environment is undervalued as we consider only those functions which enter into

formal markets; as we have a short-term goal; and as we consider only private cost5
and benefits.

2) We need to widen the product boundary by considering all the environmental

functions. Thus we include both use and non-use values to obtain TEV.
3)

Use value involves some human interaction with the resource. Direct use value
is tangible in nature while indirect use value is intangible. The indirect use
value is difficult to quantify as it is intangible. You can consider an example
of your choice. Suppose you illustrate the difference through a watershed in a
village. Then examples of direct use values are: supply of imgation water to
nearby land, drinking water supply to households and animals, fishery, etc.
An example of indirect use values is microclimatic stabilization.

Check Your Progress 2

1)

You can go through Sub-section 8.4.7to answer this question. As additional material
you can go through some case studies that have used this method, for example,
Hadker et a1 (1 997).

2)

In order to find out the TEV of the watershed you need to consider both use and
non-use values of watershed. Prepare a figure similar to Fig. 8.1 and cite at leaqt
one function under each head. For each function point out the valuation method you
willuse.

3)

See Sub-section 8.4.8 and answer.