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Posts Tagged ‘total economic value’

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A shipping lane is being proposed which would go through the Great Barrier Reef so as to improve access to a mining complex.

We must ask some questions that help decide whether the proposed lane should go through the reef or not. Who will benefit or lose out in each scenario, when, and for how long, and by how much?

In economic analysis, as £1 now is worth more than £1 in the future, future costs and benefits are discounted to create a Present Value for each impact, which you can then weigh against each other.  For a project to be recommended on economic analysis grounds only, its benefits over time need to outweigh its costs. In economic terminology Net Present Value (benefits minus costs) > 0 or Benefit Cost Ratio > 1. There are of course many other considerations in making a decision about a project that economic analysis can capture. But let’s see how we can think about this project if we were attempting to do an economic analysis (cost benefit analysis in this case).

Let’s briefly look at the case where the shipping lane does go through the reef. This will not cost the company anything extra than they had already planned. It may, however, have an economic cost to society (a negative externality); reef damage, caused by the ships, will reduce tourism in the area- a huge source of local GDP and employment in Queensland.

We can also look at the case where the shipping lane is diverted to avoid the reef. The tourist numbers and revenues don’t change, but the diversion would cost extra money to the mining and shipping companies in the form of fuel and time.

The comparison of cost of diversion and avoided damage (benefit of diversion) to the reef can conclude:

(a)    if the cost of diverting ships is less than the lost money from tourism and other marketable impacts, the shipping lane should be diverted.

(b)   if the cost of diverting ships outweighs the lost money from tourism and other marketable impacts; the direct lane should go ahead on efficiency grounds.

But hang on a minute, it’s not that simple!

We have to think about the characteristics of the reef that generate values other than the market price and revenues. It’s these social values that are not paid for in a market that are often most important to people and are what make the Great Barrier Reef, well, GREAT.

It’s not that different to what people care about when their house burns down. Do people care about the games console or the expensive pair of new jeans? No, it’s the family photos, the postcards from friends, and the paintings your son made when he was 4 years old that hang in the kitchen.

The same goes for the reef; it’s the bio-diversity, cultural heritage, national pride, the wonder and mystery, and the sheer size of it that are the most ‘valuable’.

These characteristics lead to types of value that cannot be bought, such as: Option value (I may be willing to pay to have the option to see the Reef in the future, even though I have no intention going now); Existence value (I may be willing to pay for the knowledge that the Reef exists without any intention to ever see); and Bequest value (I may be willing to pay so that my descendants can see the Reef).

By including these values, we can build a better understanding of the Total Economic Value of the Reef. ‘But how do you measure them if we can’t buy or sell them?’ I hear you cry. This is where environmental economists earn their money; they realise that these values may be hidden within the price of another good/service that is bought and sold and thus can extract it. Another method is to survey people’s preferences of different scenarios regarding the environmental asset and their associated income in each scenario.

By eliciting these values, we can monetise damage done to the reef that isn’t seen through the market and incorporate it into the decision process.

Accounting for some leeway either side, if the true cost of having a lane directly through the reef i.e. losing all values associated with reef damage, is more than the cost to companies of circumventing the reef, then there is a compelling argument that the direct lane should be shelved.

So what if, even after including these non-marketed values, the damage to the reef is less costly than the cost to the companies of bypassing it?

In reality, we can’t monetise everything and we are never 100% certain what the consequences of reef damage is in the long term; perhaps, with data only available in the future, the costs are found to be so much more than previously thought. In that case, instead of attempting to put a market value on certain attributes, we could just say that, ‘some things are critical for nature and for the people, both now and in the future, and should be protected’.

Yes, economic development may bring us monetary wealth, but perhaps we lose immaterial wealth in the process in terms of wellbeing, morals and principles. Some things are irreplaceable, and should remain that way.

Here is a link to the online petition against the lane.

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I was watching an old Big Bang Theory episode the other day; it was the one where Penny buys Sheldon and Leonard (Star Trek enthusiasts) a Spock Transporter each from the comic book store.

Penny wants to open them up and play with them, which stuns the boys; Leonard says, ‘Once you open the box, it loses its value.’ (Watch the 2 minute clip here)

Here, Sheldon and Leonard realise that things don’t always have a ‘use’ value in the traditional sense of consuming them. They recognise that the toys have an embedded value in leaving them in the box untouched i.e. mint in box. Neither of them may even consider selling them in the future, despite the toys being ‘worth’ more.

Instead, they enjoy looking at them in their pristine condition (a non-consumptive direct use value) and, also, may want to pass them on to their children – if Sheldon knows how to make a child – or donate them to a museum so that others can see them in their original state (a bequest value).

Perhaps, then, we can learn something from comic book enthusiasts and apply their ‘mint in box’ mentality to the environment. Policy-makers now take into account these direct and indirect use and non-use values into project appraisal by considering a project’s total economic value.

People wouldn’t pay as much to visit Yosemite National Park if it wasn’t kept looking beautiful, as they would not derive as much value. Therefore, it makes sense to keep it looking beautiful (see picture below).

Another non-consumptive direct use value that can be compared to the Big Bang Theory example would be improving bathing water standards. People don’t go to beaches to drink the sea water, which would be a consumptive use value. Instead, they derive value from playing in the water. If the water is not safe, then people cannot play in it; therefore there is a benefit (amongst many others) from improving it that doesn’t have a market price.

Later on in the episode, Spock comes to Sheldon in a dream and asks him what the purpose of a toy is. Sheldon replies by saying, ‘to be played with’ and thus comes to the conclusion to open it and play with it. Therefore, we need to think about what the purpose of the environment is before making decisions to change it.

The herd has done some head-scratching over this topic, and we would appreciate your input- do you agree or disagree, can you think of other analogies?

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This is the view from the highway as you travel from Kuala Lumpur International Airport into the city of Kuala Lumpur.

It is about 20km from the airport to the government city of Putrajaya, and everywhere you look is oil palm (This is not an exaggeration. For an overhead view, click here and zoom in).  For a tourist, these oil palm plantations are often one of the first views of Malaysia, even before landing in its modern airport of glass and steel, and one could be forgiven for imagining these palms to be natural growths and a native of Malaysia.  In fact Malaysia’s oil palm is a native of Guinea, Africa, and was introduced to the British colony of Malaya in 1910 by Scotsman William Sime and Englishman Henry Darby. Today, Sime Darby, the conglomerate product of this partnership, boasts of being the world’s largest plantations company, with a total of about 525,000 hectares of oil palm in Malaysia and Indonesia [1].

All in all, palm oil plantations in Malaysia made up 4.5 million hectares of land (13.7% of Malaysia’s land area of 33 million hectares [2]) and generated 15 million tonnes of palm oil in 2008 [3].  In January 2010 palm oil exports were the second largest export product from Malaysia and were worth around GBP £793 million or 8% of total exports from Malaysia in that month [4].

Palm oil obviously makes up an important part of the Malaysian economy, but at what cost?  The clearing of land for palm plantations was responsible for the loss of roughly 758,000 hectares of rainforest between 1990 and 2002, or 47% of oil palm plantations planted in that period [5].  Planning permission for palm oil plantations has mysteriously been given to convert thousands of hectares of forest previously classified as ‘permanent reserved forest’, including 6000 hectares of High Conservation Value forest; home to rhinos, tigers, honey bears, gibbons, tapirs, panthers, and ramin trees (an endangered tree species), and 3,899 hectares of forest in Terengganu State, a forest isolated from the main range and containing endemic species.  Terengganu may sound familiar as it is famous for its big mammals including tigers, elephants and our large cousins, seladang [5].

Seladang - Picture Courtesy of asianimages.wordpress.com

Surely, forests in their natural state as habitats to these and other species, and serving several ecosystem services, have economic values, even if not in cash terms. Estimating what this economic value can be is what we environmental economists do, amongst other things.

An example of such work is a study on the Leuser National Park in Sumatra, Indonesia (a very similar habitat to rainforest in Malaysia, due to its geographical proximity) which attempted to discover what we call the “total economic value” of the park for different uses of the land, including conservation and deforestation for agriculture.

Calculation of total economic value of the environment is based on individuals’ preferences for the environment and takes account of:

  • its direct use value such as the revenue from palm oil, but also as in the Leuser National Park example water supply, timber, non-timber forest resources and fisheries. Some of these uses are marketed like palm oil and timber, while others do not have markets,
  • its indirect use value from ecosystem services such as  flood and drought prevention, fire prevention, carbon sequestration. Most of these services are not traded in markets ,
  • option values for possible future use of the rainforest for medicinal cures or possible future tourism, and
  • values people may have for the environment even if they do not use it directly or indirectly (the so called ‘non-use’ value).

The Leuser National Park study found that if the park was converted to produce goods that are marketed, the accumulated Total Economic Value over 30 years would add up to US$ 7 billion. However, if the park was conserved in its natural state, the accumulated Total Economic Value over 30 years would be US$9.5 billion. This clearly shows that conservation has more value than conversion – and this is despite the fact that under the conservation scenario it is not possible to estimate many of the benefits in monetary terms [6].

On a purely economic basis, Malaysia could be losing a lot more than they are currently earning from palm oil.  The problem in reality is that even if we can have similar studies in Malaysia (and there are some), demonstrating the value of forest conservation is not enough, if marketed goods remain the only way to ‘capture’ the economic value of forests (or turn them into cash), incentive to conserve will be minimal.

Some policies are developed precisely to make conservation pay for itself. For example, REDD and REDD plus which allow for international payments for carbon sequestration and biodiversity protection, can facilitate this in the very near future [7].

A compromise between oil palm and standing forest can also be reached.  A study from the University of East Anglia showed that consumers are willing to pay more for palm oil from an environmentally sustainable plantation.  The combination of conservation and these premium prices could create a greater total economic value, including greater value for oil palm plantation owners [8].

Although this has been a very long post and I have in no way shape or form managed a complete coverage of all the factors, I should wrap up by saying that current attempts at creating sustainable oil palm plantations should be applauded.

Some of the oil palm industry in Malaysia is trying its best to be sustainable, with at least half of new oil palm plantations being planted on old plantation land between 1990 and 2002, and the largest companies being members of the Round Table on Sustainable Oil Palm.  If only Indonesia could follow in its footsteps!

[1] Sime Darby – Plantation

[2] Asia-Pacific in Figures 2006, UNESCAP

[3] Department of Statistics Malaysia – Production of Major Commodities

[4] Department of Statistics Malaysia – Preliminary Release of Malaysia External Trade Statistics January 2010 (Updated: 05/03/2010)

[5] Greasy Palms – The social and ecological impacts of large-scale oil palm plantation development in Southeast Asia

[6] Economic valuation of the Leuser National Park on Sumatra, Indonesia

[7] Koh, Lian Pin; Butler, Rhett A. Can REDD make natural forests competitive with oil palm?

[8] Bateman, I., Coombes, Emma, Fisher, B., Fitzherbert, Emily, Glew, David, Naidoo, Robin. (2009) Saving Sumatra’s species: Combining economics and ecology to define an efficient and self-sustaining program for inducing conservation within oil palm plantations

Bateman, I., Fisher, B., Fitzherbert, Emily, Glew, David William, Watkinson, Andrew. (2008) Making Tigers Pay: Marketing Conservation of the Sumatran Tiger Through ‘Tiger Friendly’ Oil Palm Production

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