The Total Economic Value Approach Accounting Essay

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ASSIGNMENT: (1) Undertake an internet scavenge for examples of mangrove ecosystem values studies. These studies should give a clear explanation of the methodologies used in the study, its objectives, the kinds of analysis the data used was put to and a thorough synopsis of the implications of the study. (2) Use the examples of the mangrove ecosystem values that you found to construct a TEV for a hypothetical mangrove system. (3) Discuss why you think the examples may or may not fit within the framework of the Total Economic Value approach and consider any shortcomings with these valuations and approach.

Introduction

Mangrove communities are an important entity of wetland ecosystems. Mangrove forests are located in the brackwish water margin between land and sea in tropical and subtropical sheltered coastal areas. (Spaninks & van Beukering, 1997)They consist of a variety of unrelated trees, plants, shrubs, vines and ferns that share a common ability to live in waterlogged saline soils subjected to regular flooding. Mangroves are commonly found throughout the world between latitudes 32 degrees north and 38 degrees south (Tomlinson, 1986). There are around 80 species of mangroves found throughout the world (Saenger et al., 1983). Mangroves can be divided into two distinct groups: exclusive and non exclusive. Exclusive mangroves are the largest group, comprising around 60 species. These mangroves are confined to the intertidal areas and have not been found to exist within any other type of vegetation community. The remaining 20 species are considered to be non exclusive. These plants are not restricted to the typical mangrove environment and are often found within drier, more terrestrial areas. Examples include Hibiscus tiliaceus and Barringtonia acutangula (Saenger et al., 1983).

Mangrove ecosystems provide a wide array of valuable resources. They include economic, human health and welfare and environmental benefits. These valuable resources are assessed through the goods, services and functions provided by mangrove ecosystems. However, often times the full value of mangrove ecosystems is not recognized. This may be attributed to two factors (Hamilton et al., 1989): (i) many goods and services provided by these ecosystems are not traded on markets and thus do not have an observable value; and (ii) some of these goods and services occur off-site and are therefore not readily acknowledged as being related to mangrove ecosystems. According to Spaninks and Van Beukering (1997) "methods for valuing environmental goods and services offer a more comprehensive valuation of the many goods and services provided by mangrove ecosystems and thereby contribute to more informed decision-making".

Theoretical/ Conceptual Framework- Economic Valuation Methodology

According to World Resources Institute (2009) "economic valuation assesses a resource in terms of its value to humans. Economic valuation studies may attempt to quantify all or some of the use and non use values of a resource." The World Conservation Union (IUCN) (2007) "economic valuation offers a way to compare the diverse benefits and costs associated with ecosystems by attempting to measure them and expressing them in a common denominator typically a monetary unit. All benefits and costs are valued in terms on their effects on humanity."

Economic valuation of environmental resources such as mangroves should be done on neoclassical economic welfare analysis (Grigulas & Congar, 1995; Gregerson, 1995; Dixon et al., 1997; Bann, 1997). The concept of 'economic value' is defined in the standard economic theory as the measurement of changes in personal well being. The theory has been further extended to measure changes in the prices and quantities of marketed goods as well as public and other non marketed goods and services. A key concept used in this analysis is the economic surplus, which consists of consumer's surplus and producer's surplus. Consumer surplus is the difference between the maximum amount that a consumer would pay and the amount that they actually pay and producer's surplus refers to that difference between the revenues received and the cost of production for specific goods.

The Total Economic Value framework (TEV) is probably the most commonly used methodology in economics to measure the economic value of the environment and natural resources (Rosales, 2005).Refer to Figure 1. According to the IUCN (2007) "TEV is the monetary measure of the incremental change in an individual's well being due to an incremental change in environmental quality. It is not environmental quality that is being measured, but people's references for change in that quality."

Figure 1: Total Economic Valuation (TEV) Framework (Source: Tri, 2007)

Economic valuation of environment is anthropocentric and it tries to assess the preferences held by people and the value determines by an exchange or transactions in the market. There is an argument that TEV is not necessarily equivalent to the Total Environmental Valve (TV) of a resource. TEV includes both anthropocentric instrumental and intrinsic values. TV includes TEV values plus other instrumental values that are not of human concern (non anthropocentric instrumental value) (CSERGE, 1995).

(Gren et al., 1994) proposes a fairly new theoretical framework for classifying wetland values. Gren et al (1994) states the total production output of a wetland ecosystem is divided between three different uses. They are (1) for its own development and maintenance which can refer to the build-up and self organizing capacity of the wetland itself; (2) exports to other ecosystems; and (3) exports to human society. A wetland's TV can be classified into two categories based on these different kinds of uses. They are: 1) the primary value or 'glue value' (i.e., the value of the ecosystem's self organizing capacity and 2) the secondary value which is the value of the other two uses and can be described as the value of outputs, life support and ecological services that the self organizing capacity generates ( Gren et al., 1994). The secondary value is consistent with the TEV. Spaninks and Van Beukering (1997) do not feel that concept of primary and secondary values is, in principle more complete than that of the TEV.

The Total Economic Value Approach

In environmental economics, according to Sathirathai (2000) 'the Economic Valuation Methodology involves the monetary measure of a change in an individual's well-being due to a change in environmental quality. This measured value is known as the Total Economic Value (TEV). The TEV consist of two main sources of value: Use Value (UV) and Non- Use Value (NUV). Refer to figure 1 above.

The Use values are commonly, further sub divided into Direct Use (DUV), Indirect Use (IUV), and Option Value (OV).

Direct use values (DUV) are the goods and services provided by the mangrove ecosystems. According to the World Conservation Union (2007) "direct use values refer to values derived from actual use of the good either for direct consumption or production of other commodities." They include consumptive or extractive uses such as forest resources (timber and food) or the productive and non consumptive or non extractive uses such as tourism and recreation (Tri, 2007; World Resource Institute, 2009. Chong (2005) defines "Indirect use values as the ecological functions which indirectly support economic activity."

According to Barber (1992) "Indirect use values (IUV) stem from the indirect support and protection to economic activity by the wetland's natural functions or regulatory and property 'environmental' services." They include ecosystem services such as water filtration and shoreline protection (World Resources Institute, 2009).

(IUCN, 2007; Spaninks and van Beukering, 1997) Option value (OV) refers to an individual's Willingness to Pay (WTP) to preserve the option of using a good in the future. The World Resources Institute (2009) "option values estimate the value of preserving the use of ecosystems goods and services for the future, including 'bequest value', where the value is for future generations. OVs are some sort of insurance values, in which people assign values to risk aversion in the face of uncertainty. Example mangroves provide potential insurance for future natural disasters like sea level rise and other natural threats associated with climate change. Forest provides an option for potential discoveries of microorganisms or genetic resources that may prove beneficial in the future (IUCN (2007)).

Additionally, Arrow and Fisher (1974) identified another class of Use Value known as the Quasi-Option value. The Quasi- Option value relates to those planning decisions where the benefits of preservation are unknown, while at the same time development is irreversible, that is, the potential benefits of preservation will be lost forever.

Non-Use values are difficult to define and measure as these values are not quantitative. Non- use values are derived from the satisfaction by individuals knowing that ecosystems exist for future generations (Chong, 2005). World Resources Institute (2009) described non -use values "as the value humans place on the knowledge that a resource exists, even if they never visit or use it." Non-use values are subdivided into Existence Value (EV) and Bequest Value (BV) (Sathirathai (2000); Chong (2005)).

The Categories of Economic Valuation Techniques / Methods

There are several valuation techniques or methods that are used to assess or quantify the benefits of ecosystem services.

Figure 2: Economic Valuation Techniques/ Methods (Source: WRI, 2008)

Literature Review

Most TEV studies for mangrove ecosystem acknowledge but do not assess the indirect benefits of protecting shorelines. Most studies focus on the direct use values and all differ from each other in a number of ways. Four case studies on the TEV of mangrove ecosystems are summarized below. They are:

Study 1: Chong, J. 2005. Protective Values of Mangrove and Coral Ecosystems: A review of methods and evidence.

Study 2: IUCN. 2007. Environmental & Socio economic Value of Mangroves in Tsunami Affected Areas : Rapid Mangrove Valuation Study, Panama Village in South Eastern Coast of Sri Lanka

Study 3: Sathirathai, S. 2000. Economic Valuation of Mangroves and the Role of Local Communities in the Conservation of Natural Resources: Case Study of Surat Thani, South of Thailand.

Spaninks, F. & Van Beukering, P. 1997. Economic Valuation of Mangrove Ecosystems: Potential & Limitations. Creed Working Paper No 14

Chong (2003) paper reviews evidence and methodologies for assessing the shoreline protective values of mangrove ecosystems. He identified that the most commonly used methodologies for assessing the protective values of ecosystems are based on costs. There are two main types of cost based methods:

The expected damages avoided by maintaining the ecosystems' protective functions, such as the cost of replacing infrastructure, or the losses to productive values of land

The defensive expenditures required to replace the protective function of the ecosystem, such as the cost of constructing and maintaining sea wall or wind break infrastructure.

The cost of relocating communities if protective functions are lost.

However, these cost bases methods have been criticized when valuing environmental functions. Spaninks and van Beukering (1997) suggest that the expected damages approach may tend to undervalue protective functions. They also suggest that it is difficult to assess whether defensive expenditures on protective infrastructure effectively substitute for the protective functions of natural coastal ecosystems. However, the cost based valuation approaches are seen as the second best valuations because of these limitations. Alternative first best methods include: Chong (2005)

Hedonic methods

Contingent Valuation methods

However, they are not the most appropriate approaches when assessing protective functions of ecosystems. The accuracy of these methods tends to be heavily dependent on the time, information and human resources available. In situations where these resources are scarce, it may be a more cost effective approach to undertake cost based methods to valuation (Chong (2005)).

IUCN (2007) study aims to explore the role of mangroves ecosystems in livelihoods, ecosystem services and protective role against extreme weather events based on the experience of tsunami. The price based approach was considered in the estimation of direct use values of mangroves. The market price of mangrove goods and services was used. The mangrove products collected form the mangrove ecosystem by the households and the related market prices were collected. Then the actual market value of each good was determined by multiplying the price by the quantity, thereby generating the gross benefits. The Participatory Environmental Valuation (PEV) technique was used for locals to express the value of mangrove products within the context of their own perceptions, needs and priorities rather than through conventional cash based techniques. The effect on value method was used to estimate the fish breeding function of mangroves. Lastly, the damage cost avoided method was used for estimating the shoreline protection functions of mangroves in the context of Tsunami. Information on personal properties damage/ destroyed, livelihood damage/ loss, physical injuries, hospitalizations and deaths due to tsunami incidence were obtained for a control site. The selected control site was not sheltered directly by the mangroves. The difference of costs of damages in the two sites was assessed.

Sathirathai (2000) has calculated the benefits of mangroves to the villagers using the TEV methodology. He calculated the direct use values using the market price i.e. mangroves products sold in the market. Surrogate prices were used for products used for subsistence purposes. He calculated the indirect use values using the offshore fishery linkages and values for coastline protection and stabilization. In estimating the indirect value generated by off shore fisheries, the Ellis-Fisher-Freeman model was applied in considering two scenarios; open access and managed offshore fisheries. The replacement cost method was adopted to assess the net benefits of the mangrove for coastline stabilization. Lastly, the foregone benefits of mangroves compared to the net returns from converting the areas into shrimp farms have also been calculated.

Spaninks and van Beukering (1997) study review and analyze the scope of limitations of valuations methods for evaluating management alternatives for mangrove ecosystems. The objective of the project 'Economic Valuation of Mangrove-Fishpond Interactions' for which the paper was written is the valuation and evaluation of management alternatives for the Pagbilao Bay mangrove reserve (Refer to Figure 3 below). The results of this studies show that many TEV studies still limit valuation to use values. Most studies limit indirect use values to the nursery function. In principle, methods are available for the valuation of the full range of products and services provided by mangrove ecosystems; but the lack of data and quantitative knowledge regarding some key ecological relationships present major constraints (Spaninks and van Beukering, 1997).

Figure 3: TEV along with the valuation methods for Pagabilao Bay (Source: Spaninks and van Beukering (1997)).

TEV for a Hypothetical Mangrove System - The Protective Values of Mangrove Ecosystems to Small Island Developing States

Mangrove Ecosystems provide important protective values to small island developing states. They protect property, infrastructure, lives and productive economic activities on coastlines from wave and storm energy (Chong, 2005). The shoreline protective services of mangrove ecosystems are very valuable during extreme weather events, such as hurricanes and tropical storms. The purpose of this study is to assess the protective value mangrove ecosystems and calculate the expenditure cost of constructing or maintaining protective coastal defenses and systems if mangroves were removed.

Use Values of Mangroves Ecosystems - goods, services and functions to be valued

There are many more use values of mangrove ecosystems (See Bann (1997); Spaninks and van Beukering (1997); Emerton and Kekulandala (2003); EEPSEA manual). However, for the purpose of this scenario, only the indirect use values will be assessed. For each of the indirect values the possible valuation techniques/ method is noted.

TEV - Goods , Services, Functions

Valuation Techniques/ Methods

Shoreline stabilization

Hedonic prices method

Cost based method -Damage costs avoided

Contingent valuation method

Storm Protection

Hedonic prices method

Damage cost avoided

Contingent valuation method

Erosion prevention (shoreline)

Erosion prevention (riverbanks)

Hedonic prices methods

Cost based method -Damage cost avoided

Preventative expenditures

Contingent valuation method

Flood and flow control

Hedonic prices methods

Cost based method - Damage cost avoided

Preventative expenditures

Contingent valuation method

Sediment and nutrient (Retention)

Protective services provided to property and production activities

Hedonic prices method

Cost based method - ( cost of replacement, rehabilitation cost method, additional establishment cost, cost of relocation )

Demand and Supply Analysis

Market Prices

Coral reef maintenance and protection

Hedonic prices method

Damage cost avoided

Contingent Valuation methods

Based on the studies presented in the literature review, the Hedonic prices methods and Contingent valuation methods are regarded as the first best methods. Chong (2005) "Hedonic methods -differences in degree of protection provided by mangrove ecosystems could possibly reflected in the difference price paid for land in these areas. Contingent Valuation - could reveal the willingness to pay for protective services". While Cost- Based methods are second best techniques. It is debatable whether first best methods are the most appropriate approaches to assessing protective functions of ecosystems. The accuracy of these methods is dependent on time, the information and human resources available. In situations where these resources are scare, it may be a more cost-effective approach to undertake cost based methods to valuation (Chong, 2005). Lastly the use of these methods must be used with caution.

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