Monday, September 10, 2012

Do we need to put a price in natural resources?

Matt Fox, a CI colleague of mine, forwarded me this Guardian article written by George Monbiot. The article got me thinking about the title of this post.  Do we need to put a price in natural resources? Also, why do we need to put such a price? Can’t we just leave the nature as it is? Two years ago, I would agree with Monbiot; putting a price on the rain and trees and the dolphins seems to be unnecessary at best, and pretentious at worst. I still understand his points though, he got the points alright.

I wish that the things are that easy, that all of us can truly live in harmony, in a Zen way, with nature. That most of us are well-connected with our highest plane of awareness, that we all understand and appreciate that every being on Earth – nay, on this Universe – is connected to each other. But sadly, that is often not the case. I am inclined to be okay with natural resource valuation (i.e., putting value on natural resource), as long as it’s within reason. But here’s the thing. I said ‘natural resource valuation’, not ‘natural resource pricing’. 

Value is not always the same as price

Coming from a developing country experience, I know that – sadly – money is still the language of the many. When people know that a live animal or a pristine ecosystem worth more than a dead animal or a damaged ecosystem, they will start to protect the animal/ecosystem, instead of destroying it.

As I have stated in this article, I am not an economist. I do, however, appreciate the strength of economics as a tool to manage natural resources. Heck, I agree with what Spangenberg said about the economy: that it is usually perceived as ‘a driving force behind most of the problems, but it could also be a force for the better, contributing to the solution of problems by creating enough wealth to solve them’ (Spangenberg 2004, p. 75). Yes, the economy has been the bad boy on the block. Now let’s ask it to be part of the solution. Some people do need to see the estimated dollar value (or rupiah, or rupee, whatever) of a resource to understand its worth. Economics gives us that tool.

Here’s where I come from:  I have no solid opinion yet about REDD or REDD Plus – too complicated for me. I only know about marine tourism valuation, particularly the economic valuation of dolphin tourism in Lovina, and similar cases around the world that I have read or heard of. Hence, the arguments and cases that I’m presenting here are simple and, hopefully, pretty straightforward for non-economists to understand. At the same time, I hope I have covered the basics of natural resource valuation without facing the wraths of pure economists for forgetting the most elementary concepts.

I will start with this: Value is not always the same as price. To paraphrase Luke Brandon of the Shopaholic series, price and worth (value) are two very different things.

I didn’t know about this until recently, until I delved into the economics of Lovina. But most people might think that the price tag of something is the same as its value, as its worth. You might only need to spend USD 2,200 for a brand new 150 cc motorbike. The producer surely has increased the price to cover all their costs plus profit. But have they included the environmental cost resulted from the manufacturing of the motorbike? Like the polluting agent released to the environment during the manufacturing and transportation of the bike to the consumers? Nah... unlikely.

In an ideal world, in addition to promoting pushbike riding, it would be great to have the environmental cost reflected in the motorbike price. Whether the producer or consumer pays is another debate. But we also need to know how much extra cost we should include in the bike price. How much does our clean air, fresh water and other natural resources around the bike manufacturing facility worth? How much do we value these natural resources? That value should be added to the cost so that someone will pay for the damage. For us to know how much the value/worth is, we need to conduct natural resource valuation.

Economists use several avenues to understand the value, e.g., Total Economic Value, which split the economic value of a resource to ‘non-use value’ and ‘use value’ (Tisdell & Wilson 2004; Stoeckl et al. 2011). See the picture here for the scheme:

The use value of a resource is further divided into two: direct and indirect use value. Examples of direct use value are when a resource is being directly used for human benefit, like we take timber and herbs from the forest or fish from the sea. It can be consumptive (like logging or fishing) or non-consumptive (like tourism). Indirect use value is when we value a resource because it indirectly benefits us, e.g., the forest protects our watershed and the coral reef ecosystem protects us from beach erosion. Researchers often use Tourist Expenditure (Orams 2002; Mustika et al. 2012; Vianna et al. 2012), Input-Output model (Dwyer et al. 2000) and the normal market price to estimate the direct use of a natural resource. Some researchers use alternative cost method and opportunity cost method to estimate the indirect use value of a natural resource, e.g., the forests (Hui et al. 2003).

The non-use value of a resource is divided into three: option value, bequest value and existence value.  When we value a resource just because it is there, just for the sake of its existence, it’s called ‘existence value’ (e.g., ‘It’s just nice to know that the dolphins are there’). We have a ‘bequest value’ towards a resource when we want that resource to still be available for future generation (e.g., ‘I want the corals to be there for my kids and grand kids’). We have an ‘option value’ towards a resource when we value the resources because we want to have the option to use it one day (e.g., ‘I want the forest to remain intact so I can visit it one day’). Economists often use Willingness to Pay method to estimate the non-use values of a natural resource (Walpole et al. 2001; Mathieu et al. 2003).

From this diagram we see that value is not only about price. We can put a price tag on a bucket of fish (use value: direct use: consumptive), which would include the cost of that fisherman catching the fish and the revenue. However, that price tag won’t reflect the whole value of that bucket of fish. Similarly, we can put a price tag on our monthly water consumption (use value: direct use: consumptive), but our water bill won’t reflect the whole value of water. For the dolphins in Lovina, the price each tourist must pay to see the dolphins for two hours won’t reflect the whole value of the dolphins in Lovina. The value of a natural resource is typically much higher than the price tag it carries.

Why do we need to value natural resources?

As I hope you can see from the previous section above, there are some reasons why I am okay with the economic valuation of natural resources. Among others, it’s important for us to have the estimated value of a natural resource, so that we know how much we lose (at the very least) if said resource is no more.

Vianna et al. (2012) demonstrated this need nicely by comparing the economic benefit of shark diving tourism in Palau versus shark fishing at the same place. The winner is shark diving tourism by more than 110 times (USD 1.2 million for shark tourism vs USD 10,800), which demonstrated that, at least for the general Palau community, the sharks are better alive than dead. Orams (2002) has also demonstrated that the humpback whales tourism in Tonga generated significant amount of income for the whole nation (USD 700,000 ca year 2000).  My own research in Lovina estimated that the village received over USD 4 million per annum from the dolphin watching tourism (Mustika et al. 2012). Although Orams’ research and my research did not compare the cetacean watching tourism with whaling (which is the equivalent of shark fishing in Vianna et al.’s paper), we demonstrated that the village/region/nation would lose quite a significant amount of money (remember that Tonga and Indonesia are developing countries) in the absence of the cetaceans.

Does it mean that we put a price tag on one shark/whale/dolphin? Yes and no. Yes, because eventually we have to come up with a number to tell the government and other stakeholders that each shark/whale/dolphin worth USD XX when alive compared to when it’s dead or no more. Vianna et al. estimated that 100 live sharks will generate USD 200 million over 16 years (which is the average life span of the sharks). To put it roughly, each year a shark will contribute USD 125,000 to the people of Palau. But it does not mean that the price of each live shark is USD 125,000 per annum. It means that each live shark worth at least USD 125,000, and more (due to their role in the food chain etc).

People working in environmental management will know that there is no free lunch in this sector. Someone must provide the means and funds for environmental efforts to happen. Particularly of late in developing countries, the main source of funding would be foreign aid, be it the governments of developed countries, UN bodies or other institutions. But environmental managers have begun to look for other sources of funding, e.g., private sectors or users. For activities like shark/whale/dolphin tourism, the users would be the tourists themselves. This is where Willingness to Pay survey comes in handy, because we can understand how much a tourist is willing to pay to support environmental initiatives, such as improved recycling system, improved waste water management, better patrol system for Marine Protected Areas, etc.

However, imposing the ‘maintenance fee’ only to the tourists is not fair, IMO. I think other users, for instance the tourist operators must also bear the cost of protecting the environment. For this, we can use the carrot/stick approach. The providers/producers/operators are subjected to tax for conducting an unsustainable activity. On the other hand, the operators can also be rewarded by tax reduction etc if their activities are conducted in sustainable manners (or at least they are working towards that).  If the price of joining a tour package is cheaper as a reward for sustainable behaviour, the consumers will eventually choose tour operators with sustainable conducts.

Coming back to the original question: Do we need to put a price in natural resources? I’d say, we need to put value in natural resources. Where does natural resource valuation matter most? In developed or developing countries? I’d say both, but more so for developing countries. The government of developing countries are typically aiming for, more than anything, higher economic growth. They (and other constituents) need to understand that there is a price for extensive use of natural resources. That we eventually have to pay, one way or the other, for environmental damages from our development. And for that, we need to calculate the resource’ value. We need to conduct the natural resource valuation, knowing well that the final number may never be as high as the real value of such resources. For our quality life as humankind depends on clean air, fresh water, healthy forests, and healthy oceans. 

The photographs and flowchart by myself; flowchart is modified from several references, including Hui et al. 2003, Walpole et al. 2001, Tisdell &Wilson 2004, and Stoeckl et al. 2011. 


Dwyer, L., Forsyth, P., Madden, J. & Spurr, R. 2000, 'Economic Impacts of Inbound Tourism under Different Assumptions Regarding the Macroeconomy', Current Issues in Tourism, vol. 3, no. 4, pp. 325 - 363.
Hui, X., Yi, Q., Lin, Z. & Bu-zhuo, P. 2003, 'Assessment of indirect use values of forest biodiversity in Yaoluoping national nature reserve, Anhui province', Chinese Geographical Science, vol. 13, no. 3, pp. 277-283.
Mathieu, L. F., Langford, I. H. & Kenyon, W. 2003, 'Valuing marine parks in a developing country: a case study of the Seychelles', Environment and Development Economics, vol. 8, no. 02, pp. 373-390.
Mustika, P. L. K., Birtles, A., Welters, R. & Marsh, H. 2012, 'The economic influence of community-based dolphin watching on a local economy in a developing country: Implications for conservation', Ecological Economics, vol. 79, no. 0, pp. 11-20.
Orams, M. B. 2002, 'Humpback Whales in Tonga: An Economic Resource for Tourism', Coastal Management, vol. 30, no. 4, pp. 361 - 380.
Spangenberg, J. H. 2004, 'Reconciling sustainability and growth: criteria, indicators, policies', Sustainable Development, vol. 12, no. 2, pp. 74-86.
Stoeckl, N., Hicks, C. C., Mills, M., Fabricius, K., Esparon, M., Kroon, F., Kaur, K. & Costanza, R. 2011, 'The economic value of ecosystem services in the Great Barrier Reef: our state of knowledge', Annals of the New York Academy of Sciences,   pp. 113-133.
Tisdell, C. & Wilson, C. 2004, 'Economics of Wildlife Tourism', in Wildlife Tourism: Impacts, Management and Planning, ed. K. Higginbottom, CRC Tourism Australia, Melbourne, pp. 145-163.
Vianna, G. M. S., Meekan, M. G., Pannell, D. J., Marsh, S. P. & Meeuwig, J. J. 2012, 'Socio-economic value and community benefits from shark-diving tourism in Palau: A sustainable use of reef shark populations', Biological Conservation, vol. 145,  pp. 267-277.
Walpole, M. J., Goodwin, H. J. & Ward, K. G. R. 2001, 'Pricing Policy for Tourism in Protected Areas: Lessons from Komodo National Park, Indonesia', Conservation Biology, vol. 15, no. 1, pp. 218-227.



Sheema said...

I can't tell you how glad I was to read this - thank you so much for writing it! I couldn't agree more. Trying to save species and habitats in Malaysia, I learnt very early on that economics is the only language spoken by policymakers in developing countries. I want to save the flying foxes from being killed but the excuse is always that they eat farmers' fruits and therefore cause economic loss, so my challenge is to prove that they provide much greater economic benefits through pollination and seed dispersal.

However, it's very difficult to communicate this reality to people living in comfort in the developed world. I find that so far all the arguments made against environmental economics are by armchair conservationists or developed world citizens who don't understand the real concept and issues behind it...these people have very elitist, first-world views of nature because they've already attained a lifestyle that's comfortable, luxurious and convenient enough to allow them to appreciate nature (and who indirectly gained that lifestyle through the destruction and exploitation of nature in the past!). They don't know what it's like to be working on the ground to try and save a patch of forest with important ecosystem services. They don't know what it's like to be a poor villager who has to exploit natural resources to survive. It's very frustrating debating with these people because they just don't get it!

Anyway, just wanted to let you know that I actually used your blogpost to prove my point in my debates with this kind of people...hopefully it will help open their eyes up a bit and understand things from other people's perspectives! :-)

Icha said...

Wow, thanks a lot Sherma! Glad to know that my post helps you in some way!

I'm tempted to write something like 'five things NGO workers in Asia need to know about economics', but I guess I'm not up to that league yet. But once I have clearer understanding, I will post it for sure!