VALUATION OF WETLANDS

Economic valuation is a powerful tool to aid and improve wise use and management of global wetland resources by providing a means for measuring and comparing the various benefits of wetlands (Barbier et al, 1997). The following are some of the terms used while quantifying the wetland benefits.

Wetland Processes: The fundamental hydrological, chemical and physical activities that occur in a wetland that are linked to its biological productivity. For example, the role of wetlands in the global carbon cycling. 

Functions: The results of the interaction of the wetland's ecological processes. Functions are the physical, chemical, and biological processes occurring in and making up an ecosystem. Processes include the movement of water through the wetland into streams or the ocean; the decay of organic matter; the release of nitrogen, sulphur, and carbon into the atmosphere; the removal of nutrients, sediment and organic matter from water moving into the wetland; and the growth and development of all the organisms that require wetlands for life.

Benefits: The goods and services made possible by a wetland's functions. For example, by reducing wave energy and stabilising shorelines, the wetland reduces the chances of property damage. This reduced risk is a benefit to society.

Value: The economic worth of goods or services, generally measured in terms of what individuals are willing to pay for (e.g., the wetland has value because it supports commercial fishery).

The value of the benefit is determined by its price, i.e., the amount of money for which it will be exchanged. The value of a benefit is the price of that product in the open market and the worth of that benefit to a potential buyer. This is measured in economic terms as willingness to pay. In other words, the economic value of the wetland services/commodity is measured by people's willingness to pay (WTP) for those benefits.The economic valuation is essentially quantification of the environmental goods and services, and the values of human beings for the environment.

Quantification of economic values of wetlands

The economic value of environmental goods and services/commodity is measured by the summation of many individuals' willingness-to-pay for it. In turn, this willingness-to-pay (WTP) reflects individuals' choice for the goods in question. Therefore, economic valuation in the environment context is about measuring the preferences/choices' of people for an environmental benefit or against environmental degradation. Valuation is therefore in relation to preferences held by people. Moreover, the use of economic values permits the comparison that is required between environmental’ and 'developmental’ values. The latter is expressed in fiscal/monetary terms, either in rupees or as economic rate of return [http://www.wes.army.mil/el/vrtc/wrp/tnotes/wgev2-1.pdf].

Using other units to measure environmental values would not permit the comparison with development values. The economic value of wetlands includes both use and non-use values. Typically, use values involve some human ‘interaction’ with the resource whereas non-use values do not. Wetland use values are associated with a diverse and complex array of direct and indirect uses. Wetland "values" may be derived from outputs that can be consumed directly, such as food, water supply, recreation, or timber; indirect uses which arise from the functions occurring within the ecosystem, such as water quality, and flood control; possible future direct or indirect uses such as biodiversity or conserved habitats; and the knowledge that such habitats or species exist (known as existence value) (Serageldin, 1993).

Values are "an estimate, usually subjective, of worth, merit, quality, or importance”. Direct uses of wetlands could involve both commercial (marketed value) and non-commercial activities whereas indirect use values are unmarketed, go financially unrewarded and are only indirectly connected to economic activities. A special category of value is option value, which arises because an individual may be uncertain about his or her future demand for a resource and/or its availability in the wetland in the future. If an individual is uncertain about the future value of a wetland, but believes it may be high or that current exploitation and conversion may be irreversible, then there may be quasi-option value derived from delaying the development activities. The quasi-option value is the value that society would place on wetlands, if all knew the complex functions of wetlands.  Uncertainty is acceptable in non-economic valuations, but must be accounted somehow in economic valuations. Quasi-option value is a concept allowing expert scientists to define wetland value. In contrast, non-use values, often referred as intrinsic or existence values are difficult to measure, as they involve subjective valuations by individuals unrelated to either their own or others’ use, whether current or future. An important subset of non-use or preservation values is bequest value, which results from individuals placing a high value on the conservation of tropical wetlands for future generations to use. Bequest values may be particularly high among the local populations currently using a wetland, in that they would like to see the wetland and their way of life that has evolved in conjunction with it passed on to their heirs and future generations in general. Table 1 lists various use and non-use values of wetlands.

In general, the direct use of marketed products of ecosystems is easier to measure since marketed products exist and their prices may be adjusted for distortions. In contrast, ecological functions, such as groundwater recharge or discharge, may have indirect use values, which are reflected in the economic activities these functions support. Usually, changes in the well being or social welfare are used to define and quantify economic value. Therefore, valuing a good or service requires one to study the change in a person’s welfare due to a change in the availability of the resource. The purpose of economic valuation is to reveal the true costs of using scarce environmental resources.

Need for Economic valuation of wetlands

Specific major reasons for economic valuation of environmental goods and services are:

• The need for economic valuation of environmental impacts and assets arises for pursuing efficient policies and investing in efficient projects and programmes.  At the most general level of intergenerational concern, valuation is still required. If transfers of resources are to be made between generations -- with the current generation sacrificing for the future, or future benefits being lost for the sake of present gain -- then it is essential to know what is being sacrificed and how much it is that is being surrendered. [http://www.unep.org/unep/products/eeu/ecoserie/ecos14/ecos141.htm].

• Macroeconomic management records monetary flows and transactions within the economy. The national accounts are widely used to indicate well-being and rates of change, and national aggregates such as Gross Net Production (GNP) are widely construed as measures of 'development'. Whether the accounts are designed to record economic activity or measure well-being, or both, they are deficient with respect to their treatment of the environment. Economic activity involves the use of materials and energy, and, once transformed into products, the same resources become, sooner or later, waste products. Any measure of economic activity, which ignores these materials and energy flows, will fail to record important activities that affect the sustainability of the economic activity. For these reasons, there is a need for widespread consensus so that the national accounts are modified and environmental 'stocks' and 'flows' are recorded. Depreciation in the stocks of natural resources requires proper valuation to ensure sustainability. [http://www.unep.org/unep/products/eeu/ecoserie/ecos14/ecos141.htm].

• Information on the economic values of policy changes (with regard to the environment) can greatly assist the in identifying the policy and sectoral priorities. Economic valuation incorporating environmental aspects helps in evaluating developmental projects, programmes and policies.

Market price and wetland benefits

Individual's Willingness to pay Vs Market price: In the environmental context, it is required to quantify ecosystem benefits in terms of priced goods (i.e. the private goods, which have market value, e.g., fish) and unpriced goods (i.e. the public goods, which have no market value, e.g., clean air, water). The market price is a measure of the minimum that some people are willing to pay for a benefit - they will buy goods/commodity, for example, if their willingness to pay is equal to or more than the market price. There are also many other forms of value beyond market economic terms including subjective and intrinsic values, which are particularly important in environmental conservation in general, especially for wetlands. Therefore, in considering the value of natural areas such as wetlands, trying to determine people's willingness to pay for benefits ranging from aesthetic beauty to recreational opportunities to clean water is very important.

The problem with using willingness to pay to measure the value of wetlands is that it requires a carefully designed survey, as it is not as straightforward as market price. Nevertheless, there is growing evidence of consumers’ willingness to pay for ecological benefits. Trends such as the growing demand for ecologically certified wood products, organic foods, shade-grown coffee, and other goods and services with an environmental advantage, suggest that there is increasing market recognition of the economic value of preserving natural areas and processes. It involves finding a willingness-to-pay measure in circumstances where markets fail to reveal that information directly.

Market Failure: Economic decisions of developmental projects, which exclude ecosystem values, lead to ecosystem degradation. Economists trace this problem to market failure, that is the failure of markets to reflect the full or true cost of goods or services. In the case of a wetland, the calculation of the economic value for converting the wetland area to housing or commercial layouts does not include costs such as loss of water quality/quantity or flood control.  Since these ecosystem services are available free to all and not purchased, there is a tendency to neglect the quantification of the vital function of these ecosystems and indirect benefits derived from them. It is only when these services are lost, the actual financial or commercial costs are incurred. So paradoxically, the zero price for wetland services is of very high value to human well-being. Since it is difficult for an individual owner to receive direct monetary benefit for those benefits, which a wetland provides to others (e.g., downstream water quality improvement or producing waterfowl which migrate elsewhere), the true value of such benefits is generally not taken into account in land use decisions [http://www.on.ec.gc.ca/wildlife/factsheets/fs_wetlands-e.html].
[http://www.ramsar.org/key_rec_7.01e.htm]

The factors that contribute to market failure in the case of natural systems are:

Distribution of costs and benefits between owners and non-owners: Unlike other assets, a wetland may deliver more benefits to the community (food, fodder, recreation, etc.) than to an individual owner. Compared to the general community, the individual owner may receive only a small proportion of benefits, such as groundwater replenishment, and therefore will tend to undervalue these benefits.

The tragedy of commons: With a widely shared resource there is little incentive for an individual to control activities to benefit others. For example, a wetland may support large populations of waterfowl, but without any sort of limits or fees, there is no incentive for any individual harvester to limit the number of waterfowls taken for incentive or bait, food or classroom experiment. The result would be a rapidly shrinking waterfowl population and the reduction of a specific benefit for everyone who uses the wetland.

Missing costs: The market price of a commodity may not reflect all the production costs. For example, if an industry disposes its effluents into a stream that feeds into a wetland, the economic damage done to the wetland, whether it's fewer fish produced or impaired water quality, is not reflected in the market price of the goods. In other words, the market does not include the lost economic value of the wetland in the company's production costs.

Cumulative effects: When taken together, a combination of relatively small incremental changes to a wetland or a number of wetlands within a watershed, can have more dramatic effects than those recognised when individual changes are made. These cumulative effects result from past, present and future changes and are difficult to recognise and assess physically as well as economically in part because of the dynamic nature of the ecosystems. The ability to measure value is also limited by the understanding of the ecological functioning and the benefits that wetlands provide for ecosystem stability. This lack of ecological understanding undervalues wetland benefits that contribute to market failure [http://www.on.ec.gc.ca/wildlife/factsheets/fs_wetlands-e.html].

Counteracting Market Failure: To counter the problem of market failure, it is necessary to find ways to calculate the economic value of wetland benefits in a way the market understands – in financial terms. This helps both the individuals and policy makers to easily compare alternative uses and policy options. A value for the economic benefits that would be lost through the development of a wetland, for example, could prompt policy makers to put resources into the conservation of the wetland instead. Similarly, such evaluations can lead to a better understanding of tax incentives, rebates or subsidies that could give individuals an economic incentive to retain a wetland. In effect, the community can purchase the wetland services from the individual, through which one can provide panacea for market failure to some extent [http://www.on.ec.gc.ca/wildlife/factsheets/fs_wetlands-e.html].