Assessing the Economic and Ecosystem Services Contribution of Forests: Issues

in Modelling, and an Illustration

Author(s): K. Chopra and P. Dasgupta
Source: International Forestry Review, 10(2):376-386. 2008.
Published By: Commonwealth Forestry Association
URL: http://www.bioone.org/doi/full/10.1505/ifor.10.2.376

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376 International Forestry Review Vol.10(2), 2008

Assessing the economic and ecosystem services

contribution of forests: issues in modelling, and an
illustration
K. CHOPRA1 and P. DASGUPTA2
1
Institute of Economic Growth, Delhi 110007, India and Indian Council for Research on International Economic Relations,
New Delhi 110003, India
2
Indian Council for Research on International Economic Relation, New Delhi 110003, India

Email: kanchan@iegindia.org; purnamita@yahoo.com

SUMMARY

This paper develops methodology for valuing forest ecosystem services. It reviews alternative approaches to modelling the forestry sector’s
contribution to well-being. It subsequently extends existing techniques of cost–benefit analysis to the forestry sector and illustrates the
application of the methodology through a case study of the state of Himachal Pradesh in India. The extended methodology captures variations
that occur because of ecological aspects of forests, sustainability concerns regarding extraction from forests and aggregation issues in valuing
ecosystem services. It also incorporates concerns about biodiversity valuation, particularly in protected areas. The paper highlights the
importance of recognising local variations in forest values, adopting a multi-disciplinary approach to valuation and the relevance of using
more than one policy instrument for managing forest ecosystems.

Keywords: economic valuation, methodology, cost–benefit analysis (CBA), sustainability, forest ecosystem services.

Evaluer la contribution des services écomiques et d’écosystèmes des forêts: problèmes de

modélisation et une illustration

K. CHOPRA ET P.DASGUPTA

Cet article développe une méthodologie pour évaluer les services d’écosystèmes des forêts. Il passe en revue des approches alternatives
pour créer un modèle de la contribution du secteur de la foresterie au bien-être. Il étend ensuite les techniques existantes de l’analyse du
coût-bénéfice du secteur de la foresterie, et illustre l’application de la méthodologie par une étude-cas de l’état de Himachal Pradesh en
Inde. La méthodologie étendue observe les variations prenant place du fait des aspects écologiques des forêts, les défis à la durabilité liés à
l’extraction dans les forêts et les problèmes d’agrégat dans l’évaluation des services d’écosystème. Il incorpore également les soucis quant à
l’évaluation de la biodiversité, en particulier dans les zones protégées. Cet article souligne l’importance de reconnaître les variations locales
dans les valeurs des forêts, l’adoption d’une approche pluridisciplinaire del’évaluation, ainsi que l’importance d’utiliser plus d’un instrument
politique pour gérer les écosystèmes forestiers.

Evaluación del aporte de servicios económicos y de ecosistema en los bosques: asuntos de

modelación y un caso real
K. CHOPRA Y P. DASGUPTA

Este estudio desarrolla una metodología para la evaluación de los servicios de ecosistema forestal. Examina enfoques alternativos para
la modelación del aporte del sector forestal al bienestar humano, y luego extiende las técnicas actuales de análisis de costos y beneficios
al sector forestal y demuestra la aplicación de la metodología mediante el estudio de un caso real en el estado de Himachal Pradesh en la
India. La metodología capta variaciones que ocurren como resultado de aspectos ecológicos de los bosques, de cuestiones de sostenibilidad
relacionadas con la extracción de madera de los bosques, y del tema de la agregación en la valoración de servicios de ecosistema. Analiza
además la valoración de la biodiversidad, sobre todo en áreas protegidas. El estudio demuestra la importancia de reconocer variaciones
locales en los valores forestales, de adoptar una metodología multidisciplinaria para la evaluación, y de utilizar varios instrumentos de
politica para el manejo de ecosistemas forestales.

INTRODUCTION
The valuation of the services contributed by a forest
ecosystem to economic activity and to human well-being is a
complex exercise, encompassing a range of social, economic
and cultural issues. Beginning with the identification of
the bio-physical aspects, to building an understanding of
the ecosystem resources, functions and attributes, to the
economic valuation of forest functions, the exercise calls for
multi-disciplinary skills. Thus, positive and negative impacts,
on-site and off-site impacts, physical, socio-economic and
psychological impacts, near-term and long-term impacts
are all to be considered (Bann 1998). Valuation of forest
goods and services is identified as an important agenda of
the ongoing negotiations of the Intergovernmental Forum on
Forests (IFF) of the United Nations.
This paper attempts to review alternative approaches
to modelling the forestry sector and valuing the services
accruing from forest ecosystems. It argues for a step-
by-step approach to integration with national income
accounts, using satellite accounting as the in-between
step. The framework of satellite accounting can be used to
integrate new techniques for economic valuation and better
ecological understanding into national income accounting.
This will also enhance the empirical understanding
and quantitative estimation of the links between forest
ecosystem services and human well-being. An illustration
from the northern Himalayan state of Himachal Pradesh uses
an extended net present value approach to valuation. The
extended methodology brings into its gamut an evaluation of
the sustainability of benefits over time and an understanding
of aggregation problems arising out of the non-additivity
of ecological services. It succeeds in illustrating that local
variations in value are of the essence and that these variations
provide interesting pointers for policy.
APPROACHES TO MODELLING OF FOREST
ECOSYSTEMS
Forests have been modelled within three alternative
conceptual frameworks with regard to their contribution
to economic activity. First, as a sector in national income
accounts in terms of their contribution to GDP; second, as
a component of natural capital, the stock of which needs
to be kept constant while a flow of goods and services is
obtained from it and, third, as an ecosystem providing goods
and services, supporting life on Earth and contributing to
economic activity and enhancement of human well-being.
The approaches reflect progressive changes in the state
of knowledge and attempts to take them into account in
addressing policy needs. These developments in the literature
are briefly reviewed in the rest of this section.
Forests as a sector in national income accounts
As a sector in national income accounts, forestry, generally
referred to as the forestry and logging sector, provides
inputs into the systems of national income accounting (the
Economic and ecosystem services contribution of forests 377
United Nations System of National Accounts [SNA]). These
systems develop consolidated accounts for nations and a set
of four/five accounts are set up to examine national income,
product and its generation from different viewpoints. These
consolidated accounts, in India, as in other countries are:
• Gross domestic product and expenditure account;
• National disposable income and its appropriation;
• External transactions account; and
• Capital finance account.
Sector-specific production and income data help to
provide aggregate estimates that fit into the double-entry
system of accounting and result in the following accounting
identity:
Aggregate demand = aggregate supply in an economy.
It follows, therefore, that with respect to flows of
production specific to a year from the production side:
Gross Domestic Product = Gross Domestic Production
– Intermediate Use
Also, from the expenditure side:
Gross Domestic Product = Private Consumption
Expenditure + Public Consumption Expenditure + Gross
Investment + Exports – Imports (1)
For the forestry sector, as indeed for other sectors, the
contribution towards gross domestic production is:
Current Production (of goods and services) = Intermediate
Use + Final Consumption Use (domestically and in the rest
of the world net of any imports) + Use as Investment (2)
With respect to capital stocks, measured at the beginning
and end of the year, usually only human-made capital stocks
were considered:
Closing Capital Stock = Stock at the Beginning +
Investments during the Year – Capital Depreciation (3)
As stocks, whatever the asset boundary that defines them,
are additive, the above equation shall hold for each sector,
unless the stock in one sector accumulates at the cost of a
reduction in stock in another sector in the same time period.
An assumption underlying the notion of income as
a measure of welfare is that all activity contributing to
economic welfare is measured by income as it is expressed
in exchange. A number of economists have expounded at
length on how this assumption is limiting, and a large part
of economic activity lies outside the purview of the market,
nevertheless contributing to human well-being. Such analysis
has resulted in an extension of the production boundary to
include production for self-consumption, in particular, in the
context of developing-country agriculture. These extensions,
following from conventions, have now become standard in
national income accounting practice. It follows that what is
378 K. Chopra and P. Dasgupta
or is not included within the production and asset boundaries
is largely a matter of convention and keeps getting revised
from time to time. In estimating the contribution of a
particular sector, such as the forestry sector, to SNA then,
one would concentrate on equations (2) and (3) above, with
a view to alternative production and asset boundaries.
In India, as in other countries, the forest sector, referred
to as forestry and logging is a part of the system of national
accounts (SNA). Just as for other sectors contributing
towards gross domestic production, the current production
(of goods and services) from the forestry sector and the
stock of closing capital (natural) is the focus here. What is
or is not included within the production and asset boundaries
in the SNA is largely a matter of convention and is revised
from time to time.
The total impact of policy changes in the forestry sector
since the late 1980s finds only a partial and distorted place
in the statistics on national income. The present system of
income accounting in the forestry sector in India takes note
of contributions by, for example, industrial wood, fuelwood,
and minor forest products. As recorded in several studies,
there is under-estimation in this too. The contribution of
forests to GDP has varied from 1 to 1.6 percent over the nine
year period from 1993–1994 to 2002–2003. It also depicts
a declining trend in some years. Part of the reason for this
declining trend is policy measures, which aim at increasing
the stock of forests while reducing extraction from it.
Chopra et al. (2002) estimate that, if a few extensions to
include some intangible services from forests are included,
the forestry sector contributed 2.21 percent to GDP in 1996–
1997 (at 1993–1994 prices).
Forests as a component of national capital
The conceptualisation of capital in the SNA captures only a
part of the capital accumulation that may have taken place
in the forestry sector. In short, stocks and flows need to be
looked at together. Such notions have been intrinsic to the
measurement of national income. Hicks (1940 and 1946)
provide the necessary condition under which income could
be regarded as an index of welfare. Hicks maintains that all
income that did not impoverish future consumption could be
considered welfare-improving. For this to be ensured, the
stock of capital had to be maintained intact. The significance
of this precondition was extended to natural and human
capital by analysts such as Hamilton and Clemens (1999),
Dasgupta and Maler (2000) and Dasgupta (2001).
Some extensions of the asset boundary of 1968 were
made in India in SNA 1993. It was said therein that only
those natural assets over which ownership rights have
been established and are effectively enforced can qualify as
economic assets. It follows that wherever forest resources
bring economic benefit to their owners, they are to be included
in produced assets. Thus, when the forests are growing
in regions that are inaccessible and no institutional units
are able to exercise effective ownership rights over them,
they fall outside the asset boundary. However, establishing
empirical estimates for such extensions is difficult. In India,
we have a long way to go to enable this to be done. The
forestry sector production and asset estimates are based on
a number of ad hoc assumptions. Moreover, measuring and
quantifying everything may be neither possible nor desirable.
To quote Vincent (1999): “A pragmatic recommendation is
to orient the accounting effort towards those values of forests
that are of obvious economic significance now and are likely
to remain so in the future and to prepare adjusted national
accounts as a special product every few years.”
Nevertheless, it is important for an economy to estimate
from time to time whether or not its forest capital is being
eroded. Methodologies for satellite accounting have been
developed to enable this to be done. A schematic description
of satellite accounts attempted by other studies (Kadekodi
2001) is reproduced in Figure 1.
FIGURE 1 Core and satellite systems and their inter-linkages
Core systems Satellite: forest sector
System of National Accounts (SNA) Selection of forestry-related sectors from SNA
and their contribution to GDP: alternative
methodology
Extension of production boundary contribution
Description of economic sectors of forestry-based production of goods and
services to GDP
Capital account: national capital and additions Extending the asset boundary
or depletions from it
Depreciation estimates to give NDP Forest stock as natural capital
The separate and additional compilation of the satellite
accounts provides two types of opportunity. It provides a kind
of periodic check (every five years or so) on how the existing
production, consumption and capital accumulation activity
in the country has impacted the stock of natural capital
embodied in the forests of the country. At the same time, the
drawing up of such a system of satellite accounting implies
taking a closer look at the services provided by forests in
different parts of the country and evaluating methodologies
to value them using state-of-the-art knowledge and the latest
data. It should also aim to move towards a more complete
picture of the contribution of forest ecosystems to human
well-being.
Forest ecosystems services
Even if all the above improvements and extensions were
made, the contribution of forests to economic activity
as reflected in national income accounts would capture
human well-being only partially, as national income
accounts themselves only partially capture the extensive
services which forest and other ecosystems render for
human well-being.
Examining the linkages between ecosystem services
and human well-being, the MEA (2005) groups the
services yielded into four categories. In this comprehensive
approach, the contribution of forests to human well-being
is best expressed by examining the provisioning, regulating,
cultural and life-supporting services they provide.
As indicated in Figure 2, human well-being depends
critically on the supporting, regulating and cultural
 Economic and ecosystem services contribution of forests 379

FIGURE 2 Services provided by forest ecosystems Economic valuation techniques can help in measuring
direct and indirect use values of the forest. However, it is
Provisioning Regulating Cultural neither feasible nor desirable to evaluate all the benefits and
Goods produced or provided Benefits obtained from Non-material benefits costs through such techniques; rather one concentrates on
by ecosystems regulation of ecosystem obtained from ecosystems those which are significant in a given context and at the same
x Food processes x Spiritual
x Fresh water x Climate regulation x Recreational time are appropriate for such an economic valuation. For
x Fuelwood x Disease control x Aesthetic instance, the measurement of option values and existence
x Fibre x Flood control x Inspirational
x Biochemicals x Detoxification x Educational values is very complicated and fraught with uncertainties.
x Genetic resources x Communal Uncertainties about benefit flows and costs also increase
x Symbolic
with longer planning horizons. Where there are fears of
Supporting irreversibility, the precautionary principle becomes relevant
Services necessary for the production of all other ecosystem services and approaches such as setting safe minimum standards are
x Biodiversity
x Soil formation more appropriate. Similarly, protected areas such as national
x Nutrient cycling parks, wildlife sanctuaries and other biodiversity hotspots,
x Primary production
should be maintained as such, and should not be subject to
any economic valuation exercise. Such services, including
the preservation of endangered species, are in principle
services provided by any ecosystem. This paper adopts priceless. It is also difficult to capture cultural values
this comprehensive classification for mapping the services through economic tools, other than those directly related
provided by a forest ecosystem. As methodologies for to eco-tourism/recreation. By an extension of the logic for
valuation of each of these services are developed and protected areas, one may therefore recommend that services
improved, the satellite set of accounts is expected to provide such as those of sacred groves or areas having similar cultural
a more comprehensive picture of the sectoral contribution values should not be part of a valuation exercise. Rather one
of forests. would turn to legal instruments and command- and-control
It is important to state, additionally, that such a sharpening approaches to implement these legal instruments to provide
of sectoral contributions would need to proceed side by side adequate protection for such services, including protected
with developments in macro-economic theory which ensure areas and sacred groves.
consistency in aggregation across sectors and addition of In recent years, several scholars have contributed to the
new concepts to accepted macro-economic indicators1. literature on techniques for valuing non-market benefits
(Freeman 1993; Bishop 1999). The basic economic principle
is to estimate the consumer’s marginal willingness to pay
VALUATION OF FOREST LAND AND ITS SERVICES: (WTP) (compensated demand) for the benefit in question
SOME COMMENTS AND CAVEATS (alternatively. the marginal willingness to accept (WTA)
monetary compensation for losing the benefit in question).
It is widely accepted that forests provide many kinds of The development of these methods has had particular
benefits, which have been classified as either tangible or significance in terms of informing decision makers regarding
intangible. However, market imperfections and, in many land use options. The monetary values arrived at for the non-
cases, market failures arise from various characteristics of marketed benefits serve as inputs into exercises for evaluating
forest benefits such that only a few of these values are reflected alternative land-use based projects in, for instance, cost–
in market prices. Economic theory holds that efficient benefit analysis (CBA).
allocation of resources is achieved by markets when prices The international focus on non-marketed values of
accurately reflect marginal costs of production and marginal forests such as carbon sequestration has served to bring these
consumption benefits. Public good–type characteristics, into greater prominence in local, national and international
externalities, information asymmetries, inappropriate or decision making with respect to land use changes and for
insecure property rights structures are among the commonly trade-offs between conservation and other development
discussed reasons for markets prices failing to reflect the objectives. Correspondingly, methods of appraisal are being
complete range of values of forest ecosystems. increasingly developed, ranging from physical approaches,
A more complete valuation of forests is, however, crucial such as the landscape approach and environmental impact
so that critical decision makers can make more informed assessments, to economic models. The debate across
choices, particularly in the context of debates on conservation disciplines has been brought closer by the growing concerns
of forests. It is in this spirit that this section briefly reviews about irreversibilities in the ecosystem and a concern about
valuation methods, before providing an illustration of a the adverse consequences of land use changes that may occur
more complete valuation of forest land in Himachal Pradesh, if decision making is unable adequately to take into account
a state in northern India. the non-marketed benefits.

1
There have been several attempts to identify ecological and economic benefits from forests. An early attempt, for instance, was by Singh and
Nilsson (1974).
380 K. Chopra and P. Dasgupta
As argued by Bishop (1999), the estimation of non-
market values in monetary terms contributes rational debate
about the relative advantages and disadvantages of alternative
courses of action, and serves to make trade-offs comparable
and intelligible, by expressing different costs and benefits
in terms of a single numeraire (i.e. monetary value). Thus,
for instance, if the argument is that economic valuation
methods fail to take account of distributional considerations,
one way out is to enrich the analysis by incorporating social
weights to favour the poor or disadvantaged groups within a
framework of CBA. Other methods of land use assessment
have also been advocated in the literature. Thus, cost-
effectiveness analysis (CEA) has been used to determine the
most economical or cost-effective way to achieve a specified
objective, and similarly, multi-criteria analysis (MCA) has
been used where multiple objectives are to be targeted.
Risk–benefit analysis and decision analysis have been other
quantitative methods that have been discussed.
However, having said that, the authors acknowledge
that there may be situations in which altogether different
criteria for land use decisions may become important and
economic efficiency needs to be considered alongside
factors such as social and cultural value, historical claims,
distributional impacts and other factors in order to arrive at a
comprehensive assessment. In the following sections the net
present value (NPV) approach is developed and applied to
estimating the benefits from forest eco-systems in Himachal
Pradesh, a state in northern India.
A POSSIBLE METHODOLOGY EXTENDING COST–
BENEFIT ANALYSIS AND NET PRESENT VALUE
Cost–benefit analysis is a tool that has been advocated in
the specific context of incorporating a range of benefits and
costs associated with forest land use decisions. A benefit (B)
is something that increases human well-being while a cost
(C) is something that reduces human well-being. With this
definition, a cost–benefit analysis (CBA) typically compares
all the costs of a project with all its benefits, and if the project
shows a net benefit it would meet with approval.
In the case of conversion of forest land to non-forestry
uses, one would include not only direct costs such as those
for clearing and burning the forest, but also benefits foregone
(opportunity costs) of the conversion of the forest, such
as loss of important environmental functions (watershed
services, micro-climate regulation) and resources (fuelwood,
timber, etc). Once the stream of benefits and costs has been
determined, these need to be discounted, as, typically, the
costs and benefits occur over long periods of time. Using a
discount rate r and a planning horizon t, the CBA rule thus
can be expressed simply as:
Ȉt (Bt – Ct) (1 + r)–t > 0
In operationalising the CBA rule, various decision criteria
have been developed in order to judge between alternative
options. These include the net present value (NPV), internal
rate of return (IRR) and the benefit–cost ratio (BCR). The
net present value criteria follow the general CBA rule as
mentioned above, and compute present value by discounting
the benefits and costs that occur through time back to the
base year (t = 0). Any project for which the NPV is negative
is not worthwhile. Maximising NPV is a criterion that is
particularly useful if one has to rank alternatives or choose
between alternatives. In such a case, the project with the
highest NPV should be selected. It is important to keep in
mind that NPV can be expressed in terms of per unit of land
area or in terms of a whole project involving conversion of a
certain plot to another land use.
However, several important methodological issues arise
in applying NPV. Choosing the appropriate rate of discount
and the choice of planning horizon often requires value
judgments. Issue of risk and uncertainty, distributional
concerns, and the sustainability of the resource in question
are important considerations to which there are no easy
answers.
Ensuring sustainability of resource flows over time
The most critical assumption in valuing an asset over time
relates to the sustainability of resource flows. Physical
indicators, defining ecological sustainability of the forest
land in question, become crucial before any meaningful NPV
exercise can be conducted. For instance, if the prevailing rates
of extraction are unsustainable, then ecologically, the flow of
benefits needs to be adjusted accordingly. There is a need
therefore to allow for such degradation, taking into account
both past trends and possibilities for potential degradation in
the longer-run time horizon.
In many cases, however, the sustainable or economically
efficient harvest rate is not known and cannot be estimated
directly. In that case one would need to rely on sensitivity
analysis to illustrate differences in net benefits under
different assumptions about physical output or impact. The
compensatory project approach may also be helpful in this
situation, as a way of accounting for the loss of benefits due
to excessive levels of resource exploitation (Bishop 1999).
This compensatory project approach is an application of the
principle that the the value of a capital asset must be kept
constant while attributing a sustainable flow of income to
it. Another way of taking this into account is by adding the
user cost of the capital asset to the NPV to estimate the per
hectare value.
Valuing irreversible change and non-substitutable
resources: understanding the limits to the use of NPV
Another issue which deserves separate mention is the
valuation of life supporting non-substitutable resources
such as biodiversity and the justification for the use of
a precautionary principle for preserving such values.
Biodiversity provides life-supporting services for human
beings and other species on earth. A relatively minor part
of this contribution can be captured through economic
valuation, as demonstrated later in this paper. However,
a large part is not. It is neither feasible nor desirable that
economic valuation be applied to all services accruing from

forests. Once this is understood, policy instruments such as
well-implemented legal provisions and social norms can be
used to ensure conservation. Legally protected areas and
other biodiversity rich areas in particular are best kept in
this category (IIED 2000). In the present study methodology
and estimation, there has been no attempt to find economic
values of biodiversity in protected areas. In the case of
non-protected areas, biodiversity values are estimated for
different land use types.
While a few attempts have been made in India to estimate
the economic value of the tangible and intangible benefits
of forests, in most cases the methodologies used have
been constrained by the lack of an eco-systems approach
or data limitations. The most recent attempt at calculating
NPV per hectare of forest land for Himachal Pradesh
(Expert Committee 2006) attempted to integrate findings
from methods that have been used in valuing India’s forest
benefits. In this paper the methodology adopted is based on
the theory of cost–benefit analysis. The methods adopted
for calculating the contributions from forest ecosystems is
illustrated through a case study of Himachal Pradesh in the
following section.
NPV AS AN APPROXIMATION OF FOREST VALUE
FOR HIMACHAL PRADESH—AN ILLUSTRATION
Himachal Pradesh, a state in northern India, lies in the hill
region of the Himalayas. It has a substantial part of its area
designated as forest land (25.78 percent). In terms of volume
per hectare (density of growing stock) Himachal Pradesh
(203.5 m3 per ha) is amongst the leading states in India.
The distribution of various species follows fairly regular
altitudinal stratification. The vegetation varies from dry
scrub forests at lower altitudes to alpine pastures at higher
altitudes. The richness and diversity of flora can be gauged
from the fact that out of total 45 000 species found in the
country as many as 3 295 species (7.32 percent) are reported
in the state.
According to the latest forest department statistics of
Himachal Pradesh (2004) the forests of HP can be classified
into the following legally defined categories. Majority of
forest area, around 58 percent, falls under the legal category
of undemarcated protected forests. This is followed by
demarcated protected forests, which comprise around
31 percent of forest area in HP. The other categories like,
reserved forests, unclassed forests and others have a small
percentage.
NPV refers to the discounted sum of INR values of eco-
system goods and services that would flow from a forest over
a period of time net of costs incurred. NPV will then mean the
loss of value of the forest resources (as viewed above) to the
stakeholders or the users. Seven products and services have
been valued in this exercise: timber, carbon sequestration,
eco-tourism, non-timber forest products (NTFP), fuelwood,
fodder, and watershed services.
In addition, biodiversity has also been valued partially
for non-protected areas. It is considered that these services
Economic and ecosystem services contribution of forests 381
taken together provide a fair approximation of the value of
products and services flowing from non-protected areas.
Table 1 summarises the techniques that have been
used for estimating the annual value of benefit and costs
associated with various identified forest values for purposes
of the present study.
It is also to be noted that expenditure is also incurred by
the forest department on costs that cannot be apportioned
across different goods and services such as costs incurred
in construction and maintenance activities and expenditure
on wages and salaries. These have to be deducted from the
total benefit to arrive at net benefit from a particular patch
of forest. A social rate of discount of 5 percent (Murty and
Goldar 2006) and a time period of 20 years is used to arrive
at the NPV of the stream of net benefits accruing for the state
of Himachal Pradesh in this illustrative exercise.
NPV is estimated at forest circle level for different kinds
of land use within the category of forests. The landform
or land uses within forests for which NPV is estimated
are: dense natural forests, lopped natural forests, open tree
savannah and timber plantations. It is found that such an
estimation at circle level is possible, given the present data
availability. Biodiversity in protected areas is treated as not
to be tampered with and it is recommended that the law be
used for its protection. An approximate value for biodiversity
in non-protected areas is obtained, based on inputs from
ecological studies.
A few distinct features of this valuation need to be
pointed out. The NPV of forest land is found after ensuring
that the stock of forests should not deplete. Past patterns of
use and available estimates of area and biomass are studied
to enquire as to whether or not this is a feasible assumption
for a particular state/circle. If extraction is found to be non-
sustainable, an additional cost named user cost, approximated
by preservation value would need to be added to NPV as
a social cost of ensuring accrual of services. Ecological
evidence on the incorrectness of simple additivity across
values of services is also taken into account in estimating
NPV of different kinds of landforms or land uses within
forests.
It is to be noted that for such an exercise, it is the NPV
per hectare of land with forest cover that is considered to
be relevant rather than the total land owned by the forest
department. The definition provided by the Food and
Agriculture Organization (FAO) is used to identify such
forest area (i.e., as that having tree canopy cover of more
than 10 percent over an area of more than 0.5 hectares with
forestry as the principal land use).
The extent of protected areas in HP varies from 9
percent in Nahan to 52 percent in Dharamshala. The average
protected area for the circles is quite high at 26 percent of
the total. It should be highlighted that calculations of NPV
per hectare in this exercise are based on these non-protected
areas, referred to hereafter as net forest area (NFA). Finally,
certain costs (forest departmental costs) that could not be
apportioned across different benefits within each circle,
including forest department costs, expenditure incurred in
construction and maintenance activities, and expenditure on
382 K. Chopra and P. Dasgupta

TABLE 1 Methods for the estimation of benefits and costs

Good/service Annual value Annual costs

• Long-run stumpage-value approach Costs of production (departmental), extraction and
Timber
• Stumpage price of mature timber transport
Value of carbon stock = carbon content x market
rate of carbon
Carbon value Carbon content = biomass x IPCC-GPG default No direct costs.
value***
Biomass = growing stock × conversion factor
Total value of fuelwood collected in a normal
year = number of rural households collecting Cost of collecting fuelwood = (number of rural
Fuelwood and fuelwood from forest in last 365 days × average households) × (total annual time cost of collection
fodder* value of collection per collecting household. per household valued at 15% of average agricultural
(The value to be used is the relevant price in the wage rate)
nearest local market)
Per ha value of NTFP collected in each circle =
value of NTFP in each circle /net forest area in
Cost of collecting NTFP = (number of rural
Non-timber forest each circle
households) × (total annual time cost of collection
products (including Value of NTFP in each circle = value of NTFP
per household valued at 15% of average agricultural
grass) collected in a normal year per household ×circle-
wage rate)
wise rural households (the value to be used is the
relevant price in the nearest local market)
Per hectare value of eco-tourism in each circle
= total value of eco-tourism in each circle/net
Costs incurred by the forest department in the
forest area in each circle.
maintenance, preservation and development of
Eco-tourism Value of eco-tourism dependent on forest
national parks and wildlife sanctuaries. The per ha
ecosystems = number of people visiting different
costs were calculated to arrive at costs for each circle.
circles per year mainly because of natural beauty
× average expenditure incurred per person
Value per ha for soil conservation and
As per site-specific secondary studies (Kumar 2004,
Watershed services hydrological services from secondary site-
Chaturvedi 1992)
specific studies**

*Note: The value for fodder would be calculated in the same manner as for fuelwood
**For watershed benefits it may be noted that the conclusions from case studies can vary because of the complexities involved in accurately
quantifying underlying ecological relationships
***Intergovernmental Panel on Climate Change (2003)

forest officials (wages and salaries) have been deducted from
the total benefit to arrive at net benefits for the circle.
It is also important to take note of the type of forest by
land use category, whether it is a dense natural forest, lopped
dense forest, open tree savannah, monoculture plantation,
mangrove or coastal forest or snow-bound forest. Within each
forest circle, a categorisation of land use category enables
one to determine which of the seven products and services
accrue in what combinations from different land uses. This
avoids any double counting and overestimation of value of
the forest land being managed in a particular manner. The
time horizon for NPV calculations is recommended to be
20 years, considering the plausible mix of species and their
different maturity periods.
Verifying assumptions on sustainable accrual of forest
services and products
In arriving at the NPV estimates it is assumed that current
levels of extraction are sustainable for the next 20 years.
Sustainability of flow of these services can be ensured only
if the stock of capital remains constant. This can be looked
at in different ways, two among them being (a) forest cover
by density classes and (b) growing stock of different species.
In the present context, an estimate of changes in the forest
capital of Himachal Pradesh is derived from two kinds of
indicative evidence based on secondary sources. First, a
study of the trend in land with forest cover (treated as an
index of change) reveals that it has been non-declining since
1987, with a marginal increase in the recent past (Figure
3). Second, a study of the asset accounts of some major
species compiled recently (Haripriya 2000) also reveals that
closing stocks are higher than the opening stocks for these
species (Table 2). It is therefore assumed that the trend will
continue and that the flow of products and services will be
non-declining for the two decades to come. There is, in this
case, no need to assume an additional user cost of capital to
be charged to potential users of the forest land.
 Economic and ecosystem services contribution of forests 383

FIGURE 3 Land with forest cover and linear trend in forest hectare for each circle (Table 5) varying from US$11 750 per
cover for HP hectare to US$23 650 per hectare, given the assumptions of
the methodology. It may be reiterated that these calculations
are based on only seven services for non-protected areas.
15000
14500
14000 Reckoning with problems of aggregation and valuing
13500 biodiversity partially
13000 In a situation where the benefits are being determined by
km2

12500
12000
complicated ecological processes, it is incorrect to simply add
11500 up the value of services from forest ecosystems. As different
11000 kinds of land cover in forests yield different combinations
1987 1989 1991 1993 1995 1997 1999 2001 and levels of services, the values for the different services
Year cannot be simultaneously realised either partially or fully in
almost all situations. In other words, a simple aggregation
forest cover linear (forest cover)
may amount to double counting. Table 6 presents one

TABLE 2 Assets accounts of different categories of forest in Himachal Pradesh, 2001–2002 (volume in ‘000 m3)

Activity/forest type Pine Deodar Fir/spruce Other species Total

(1) Opening stocks (standing volume) 89 232.40 54 225.70 137 889.10 58 073.80 339 421.00
(2) Net changes due to economic
activity (–) (net of deletion and 467.59 286.76 733.50 304.34 1 792.19
afforestation)
(3) Net other volume changes (net of
1 367.77 665.49 1 408.89 890.17 4 331.70
additions and reductions)
(4) Other accumulations
(encroachment & transfer of land to 7.32 4.448 11.309.00 4.765.00 27.841.00
other activities) (–)
(5) Net volume change
892.86 374.28 664.08 581.07 2 551.66
(5=2+3+4)
(6) Closing stocks (6=1+5) 90 125.26 54 599.98 138 553.18 58 654.87 341 932.60

Note: Framework adapted from Haripriya (2000)

TABLE 3 Per hectare annual net benefits of forest services in Himachal Pradesh (INR*)

Circle Timber Carbon NTFP Eco-tourism Fuelwood Fodder WS

INR* INR* INR* INR* INR* INR* INR*
Bilaspur 2 074 18 945 9 789 14 542 4 150 4 145 22 207
Chamba 1 499 30 718 1 023 1 658 322 319 22 207
Dharamshala 3 034 13 245 7 555 7 765 2 028 2 025 22 207
Mandi 922 32 915 3 426 339 836 835 22 207
Nahan 765 11 208 1 697 821 515 515 22 207
Shimla 1 535 25 132 1 084 12 791 304 304 26 952

Note: WS: Watershed services

* 40 INR = ~US$1

Circle-wise NPV estimates
Table 3 presents the annual per hectare net benefits for each
circle in HP based on the methodology as discussed above.
The NPV is subsequently estimated for the different forest
circles, using a discount rate of 5 percent for a time period of
20 years. Table 4 presents the NPV estimates obtained.
To sum up, a simple addition would yield an NPV per
possible classification that could be followed to account for
the fact that different land use forms yield varying mixes of
these service flows. Ecological studies distinguish between
the mix of services obtained from different kinds of land use
within forests. Dense natural forests would yield a higher-
level of hydrological services, non-timber forest products
and soil conservation services. Monoculture plantations on
384 K. Chopra and P. Dasgupta

TABLE 4 NPV+ per hectare of forest services at 5 percent rate of discount for 20 years (INR*)

Circle Timber Carbon NTFP Eco-tourism Fuelwood Fodder WS

Bilaspur 25 843 236 097 121 998 181 220 51 720 51 659 276 748
Chamba 18 687 382 818 12 746 20 664 4 010 3 981 276 748
Dharamshala 37 812 165 062 94 148 96 771 25 270 25 241 276 748
Mandi 11 488 410 194 42 692 4 223 10 420 10 408 276 748
Nahan 9 529 139 681 21 149 10 228 6 423 6 415 276 748
Shimla 19 134 313 196 13 508 159 408 3 793 3 789 335 881

Note: WS: Watershed services

*40 INR = ~ US$1
+
Net present value

TABLE 5 NPV+ per hectare (simple aggregation-based the other hand yield more of timber and carbon sequestration
method) (INR)* services.
Based on Table 6, the distribution of the percentage of
Circle NPV values from different services is combined with data on the
Bilaspur 945 285 type of forest cover for each of the circles in HP to obtain
more precise NPV estimates in Table 7.
Chamba 719 654
A further gain from such ecological information is
Dharamshala 721 052 that it becomes possible to attempt to incorporate a value
Mandi 766 173 of biodiversity at least for non-critical protected areas for
Nahan 470 173 each circle. This is done by using the weighting between
Shimla 848 709 biodiversity and other goods and services implicit in
Table 6 2.
*40 INR = ~US$1 From this exercise, as presented in Table 7, it can
+
Net present value be concluded that the value of a hectare of forest land in

TABLE 6 Land use and ecosystem services

Product, service or benefit

Land use type Hydro- Carbon
Fuel- Leafy “Minor” Soil con- Biodi-
Timber Fodder logical seques-
wood matter produce servation versity
benefit tered
Dense, natural forest 0 +++ ++ 0 +++ +++? +++ +++ +++
Dense, lopped forest ++ +++ +++ + ++ +++ +++ + ++
Open lopped forest + ++ ++ +++ + ++ ++ + +
“Pure” grassland 0 0 0 +++ 0 ++ ++ + +
Monoculture planta-
+++ + + + 0 ++ + 0 +++
tion
Paddy cultivation 0 0 0 ++ 0 ++? ++? ? 0
Barren land 0 0 0 0 0 – 0 0 0
Local
Regional
Global

Extent of benefit: +++ = high; ++ = medium; + = low; 0 = none; – = negative

Source: Lele (2004)

2
Biodiversity in non-protected areas is given a weightage of 3/19 for dense natural forest, 1/14 for lopped natural forest and 1/19 for open
tree savannah.

TABLE 7 NPV+ per hectare as per land use classification (INR*)
Circle Dense natural forest Lopped natural forest
Bilaspur 923 582 782 483
Chamba 660 277 606 118
Dharamshala 675 759 591 927
Mandi 707 540 655 356
Nahan 434 252 399 482
Shimla 756 765 636 036
*40 INR = ~US$1
+
Net present value
Himachal Pradesh can vary from US$23 000 for dense
natural forest in Bilaspur circle to US$5 300 for timber
plantations in Nahan circle.
With the above assumption and methodology there is a
large variation in the per hectare value of forest land under
different kinds of uses. The lowest value of dense natural
forest, which is US$20 500 per hectare, is in the Nahan circle
and the highest is in the Bilaspur circle, which is US$23 000
per hectare. The range of values in the case of lopped natural
forest is from US$9 500 per hectare in Nahan circle to
US$19 500 in Bilaspur circle. Similarly, the range of open
tree savannah varies from INR 3.14 lakhs3 per hectare in
Nahan to US$17 000 per hectare in Bilaspur. Finally, timber
plantation has the lowest per hectare value ranging from
US$ 5300 per hectare in Nahan to USD 11 500 per hectare in
the Chamba circle. It is clear that there exists great variation
both across scale and land use in the value of forest land.
CONCLUSIONS
The extended NPV methodology used in this paper captures
variations even within the relatively small state of Himachal
Pradesh because it:
(a) Takes into account spatial differences in forest stock
and density cover and inter-temporal differences in
anthropogenic use resulting in either sustainable or else
non-sustainable extraction;
(b) Accounts for biodiversity value outside natural parks.
Needless to say, there are constraints imposed by data
and information availability, which need to be improved over
time. Even though the methodology arrives at approximate
figures, these are estimated with a higher level of confidence
than averages based on states which make little sense in
particular in the context of policy.
Another significant finding is the sensitivity of results
to the estimates of growing stock. This is particularly true
for carbon sequestration and timber values. As Himachal
Pradesh has better estimates of growing stock, the degree
of confidence in those estimates is high. As a matter of fact,
3
1 lakh = 100 000
Economic and ecosystem services contribution of forests 385
Open tree savannah Timber plantation
681 946 398 611
477 829 465 129
496 625 306 508
511 244 490 582
314 341 213 407
554 981 423 773
it reflects the need for better management of available data
scattered in different governmental agencies and departments.
Some of this coordination has been attempted by the Indian
Council of Forestry Research and Education (ICFRE), but a
great deal more needs to be done.
This study introduces some ecological aspects of forests
into a valuation exercise to make it more policy-relevant and
to illustrate the limits of a single disciplinary approach or of
one instrument in the framing of policy. Such understanding
has existed in the policy domain, though it does not often
get reflected in the dependence on quick and easily obtained
numbers. The larger understandings, which emerge from the
study, are as follows are:
• Although valuation, if carried out at the relevant scale
and using the appropriate techniques, is important,
aggregation and averages can at times be incomplete;
• Before being put to use for policy purposes, valuation
methodology needs to be supplemented with an
examination of distribution of the value between
stakeholders at local regional and national levels so that
appropriate fiscal mechanisms can be set up to ensure the
correct distribution of the value of the capital asset in the
event of its conversion to another use.
• Distributional justice issues also require that a study of
rights, privileges and concessions accompany valuation
exercises.
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