Economic Valuation of Wetlands

The first stage in the evaluation process is to choose appropriate economic assessment approach based on the problems confronting the analyst. There are three approaches or issues most relevant to the economic analysis of wetlands. They are as follows:

Impact analysis – would be appropriate, if the problem is a specific external impact (e.g., effluent from a textile industry polluting a wetland, oil spills on a coastal wetland, etc).

Partial valuation - would be suitable, if the problem is the necessity of making a choice between wetland use options (e.g., conversion of wetland to residential land or sports complex, whether to divert water from the wetlands for other uses, or to convert/develop part of the wetlands at the expense of other uses).

Total valuation - if the problem is more general (e.g., developing a conservation/restoration strategy requires assessment of total net benefits of the wetland system).

Total economic value can be expressed as:
TEV = Direct Use Value + Indirect Use Value + Option Value + Existence Value.

Defining the wetland area

The second stage in this process is to define the wetland area and specify the system boundary between this area and the surrounding region based on maps of land use/land cover (e.g., agricultural use, vegetation etc.), flood extent and soils. The boundary of the wetland along with land use and land cover in the catchments/basin is to be mapped, using remote sensing data, Survey of India (SOI) maps or any other maps.

Identifying and prioritizing wetland resources

The third step involves using various data sources, including scientific studies, consultancy reports and national resource inventories, to produce a more definitive list of components, functions and attributes present in the wetland, and then place them in their order of importance. This may be in rank order, say 1 to 10, or expressed as being high, medium or less significant based on its importance. Clearly, no single wetland will exhibit all of these, and it is important for the multidisciplinary team to work together to identify the key components, functions and attributes of the wetland being studied and to use all the available ecological, hydrological and economic information to score these various characteristics.

Relating wetland resources to use value and gathering information required for assessment

The fourth step is to determine whether each of the wetland resources (e.g., components, functions and attributes) is associated with direct, indirect or non-uses. Different physical, chemical and biological data will be required depending on the values that are to be assessed, and the methodology for collecting and analysing the data must be specified.

Interviews with local communities, census data and consultancy reports are usually good sources of information on direct use. For example, obtaining agricultural and fish yields may involve interviews with farmers and fishermen, collection of statistics from government offices and visits to markets.

An indirect use value requires detailed field investigations, concentrating on the physical links between wetland system functioning and the economic activities affected. For instance, to assess hydrological functioning, water quality, sedimentation, pollution retention analysis, etc., are required.

Option, quasi option and existence values – may be more difficult to determine, and it will often be done with the help of the multidisciplinary team, keeping in mind the difficulties of quantifying these values.

Data collection begins with a literature survey of available statistics, existing studies, and their analysis for the region, which may yield some of the required information. Next, site surveys of specific economic activities have to be undertaken. In the first instance, a rapid rural appraisal based on brief interviews with farmers or producers would help to collect basic information on human uses and economic data. More detailed baseline surveys may be required for in-depth data collection for actual valuation purposes. In all cases, it is important to be clear in advance about the information required so as to avoid collecting ‘data for data’s sake’.

Quantifying economic values

Interviews with local communities, census data and consultancy reports are usually good sources of information in calculating the wetland resources. Various valuation techniques are:

(i) Market prices method

The prevailing prices for goods and services traded in domestic or international markets are used for quantifying wetland resources.
Market prices reflect the private willingness to pay for wetland costs and benefits that are traded (e.g., fish, timber, fuel wood, recreation, etc).
Price data are relatively easy to obtain.
Market imperfections, policy failures and seasonal variations may distort market prices, which will therefore fail to reflect the economic value of goods or services to society as a whole.

(ii) Efficiency prices method

Use of market prices but adjusted for market imperfections and policy distortion.
Shadow prices may also be calculated for non-marketed goods.
This reflects the true economic value to society as a whole, ‘artificial’ prices may not be accepted by the decision-makers.

(iii) Travel cost approach

Widely used to estimate the value of recreational sites including public parks and wildlife reserves in developed countries.
The travel cost approach derives willingness to pay for environmental benefits (e.g., eco-tourism).
It needs information on the amount of money and time that people spend to visit the location.

(iv) Contingent valuation method

Contingent valuation surveys directly ask people what they are willing to pay for something they value or are willing to receive in compensation for tolerating a cost.
Personal valuations for increase or decrease in the quantity of some goods based on a hypothetical market. The aim is to elicit valuations or bids, which are close to what would be revealed if an actual market existed.

(v) Hedonic pricing method

Hedonic pricing has the potential for valuing certain wetland functions (e.g., storm protection, groundwater recharge, etc) in terms of their impact on land values, assuming that the wetland functions are fully reflected in land prices.
The value of an environmental amenity (such as a view) is obtained from property or labour markets. The basic assumption is that the observed property value (or wage) reflects a stream of benefits (or working conditions) and that it is possible to isolate the value of the relevant environmental amenity or attribute.
Application of hedonic pricing to the environmental functions of wetlands requires these values to be reflected in surrogate markets. The approach may be limited where markets are distorted, and choices are constrained by income and information. Information about environmental conditions is not widespread and data are scarce.

(vi) Production function approach

Estimates the value of a non-marketed resource or ecological function in terms of changes in economic activity by modelling the physical contribution of the resource or function to economic output.
Widely used to estimate the impact of wetlands and reef destruction, deforestation, water pollution, etc., on productive activities such as fishing, hunting and farming.

(vii) Related goods method

Utilises information about the relationship between non-marketed goods or services and a marketed product to infer value.
The barter exchange approach relies on actual exchange of non-marketed goods and this approach requires information on the rate of exchange between two goods.
The direct substitute approach simply assumes that marketed goods can be substituted for non-marketed goods and requires information on the degree of substitution between two goods.
The indirect substitute approach also relies on substituted goods, but if the latter is not exchanged in the market its value is inferred in terms of a change in economic output (i.e., the direct substitute approach combined with the production function approach). This indirect substitute approach requires information on the degree of substitution and contribution of the substitute goods to economic output.

These approaches may provide a rough indicator of economic value, subjected to data constraints and the degree of similarity or substitutability between related goods.

Implementing appropriate appraisal method

In the ultimate step, the economic analysis of the wetlands should be placed in the appropriate framework as preferred during the planning for the study. For instance, cost-benefit analysis (CBA), normally involves calculating on an annual basis the benefits and costs of conserving the natural wetland functions, products and attributes over a selected time period. The three most common methods for comparing costs and benefits are net present value, internal rate of return and benefit-cost ratio. Valuation exercise is normally subjected to sensitivity analysis, which defines the variation in results arising from different assumptions or benchmark values used in the study, such as discount rates.

The other possible available appraisal methods are as follows:

Environmental impact assessment - this framework is used where there is a need for detailed documentation of essential environmental impacts, adverse effects and mitigation alternatives.

Cost-effective analysis (CEA) - it selects land use option that will minimise costs of realising a defined non-monetary objective. In this case, there is no need to value benefits, but to focus on cost information that is more readily available and provides implicit values of objectives.

Multi-criteria analysis - this involvesmathematical programming techniques to select options based on objective functions including weighted goals of decision-makers with explicit considerations of constraints and costs.

Risk assessment or risk-benefit analysis - this evaluates benefits associated with a land use option in comparison with risks.

Decision analysis (DA) - this involves step-by-step analysis of the consequences of choices under uncertainty.

These appraisal methods may also require economic valuation as part of the assessment procedure. Initial planning of the study should determine which framework is desirable for assessing costs and benefits, as the choice of framework may affect all the above steps in the analysis.

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