Институт Устойчивых Инноваций

Improving the methodology for an economic valuation of natural resources and ecosystem services as part of a humanist approach

Improving the methodology for an economic valuation of natural resources and ecosystem services as part of a humanist approach

Sustainable development does not fit with the misguided role that natural resources and ecosystem services play in enhancing people’s wellbeing and quality of life. In fact, soil, water, atmosphere, minerals, plants, animals, insects and other genetic resources have always been and will continue to be the basis of economic development. Underestimating their value leads to false estimations being made of the wealth reserves held by the State, regions and local areas. This inevitably results in strategic and tactical mistakes being made at all levels of a regional organisation, particularly miscalculations relating to investment and tax policies. This is particularly significant for a country such as Russia where the population’s prosperity is to a large extent provided by its natural resource base.

From an economics perspective, the main issue for growth is to decide which resource use, including environmental, is the most profitable. Under perfect economic conditions, market prices represent true socially-weighted values which provide a direct stimulus for allocating resources to where they can be most profitably used. They act as carriers of abstract information about the state of the market and form a unique price-based environment (a term used by F.A. Hayek). Changes in relative prices occur through a filter of logical thoughts that inform their interpretation and initiate institutional environmental change. This applies to formal and, to a lesser extent, informal institutions. Price changes under real market conditions can have different effects, which sometimes result in institutional change, or in a review of contracts that fall within existing rules [1]. Relative price changes lead to a rationalisation by people of what shapes standards of environmental behaviour.

In reality, there is no such thing as perfect markets. As far as natural resources are concerned, this means that only a fraction of their potential value is reflected in market prices, while the remainder (costs and benefits) cannot easily manifest themselves in market processes. As a result, their value is not properly calculated (or even taken into account) in decision-making on growth. There are a number of misconceptions about a lack of natural goods which ignore the views of local people regarding the value of an individual resource, or the rationale behind a particular form of natural resource use. In other words, the market system in its current form does not allow environmental resources to be allocated effectively, i.e., by not providing an accurate monetary appraisal of resources that are destroyed through our use. So-called market “failures” can mainly be put down to the absence of any value for the many natural goods and of corresponding markets (the Earth’s atmosphere, waterways, major ecosystems, landscape, sound and electromagnetic spectrums, etc.). For example, eco-resources such as air or water traditionally have had no value or any significant monetary value which has led to their over excessive use. This situation is complicated by the public nature of many natural goods which can never be privately owned, and to which the public is given open and free access. However, while not formally considered a commodity and so outside the market system, natural goods are nevertheless becoming a productive factor, i.e., falling within a system that generates net profit.

In addition, current economic analysis practices that evaluate project costs and decision-making do not take so-called external effects (externalities) into account, i.e. the impacts of work undertaken by a company (or individual) on behalf of other businesses, community groups and individuals who do not participate in such work. For example, tree felling on a mountain slope creates increased sediment levels of in the streams, which leads to burdens and costs being placed on farms located downstream and not on those who carried out the work. Consequently, costs incurred by the one party in dealing with the problem have to be compensated by the other.

Serious difficulties are also caused by factors such as unavoidable transaction costs (problems associated with the need to implement agreements and conditions involved in shared use of natural resources, i.e. costs for time and effort, expenses involved in negotiations and consultations, acquiring information etc.), as well as a vague definition of property rights in relation to natural and environmental resources. Finally, there is uncertainty caused by a lack of knowledge on the environmental impacts of business activities in terms of irreversible effects on many ecological processes that have been exacerbated by short-sighted environmental policy decisions that prefer to deal with short-term impacts while underestimating long-term considerations. All this leads to a constant increase in problems of natural resource depletion, the accumulation of waste and the “bestowing” of these burdens on to future generations.

In its research to place an economic evaluation on natural resources and ecosystem services, Cadaster Institute has come up with some methodological principles for establishing an absolute economic value [2], which have been developed according to the theory of utility [3]. Using such a basic conceptual approach makes it possible to mitigate the effects of “market failures” in relation to environmental resources as it provides the tools for evaluating through economic indicators the maximum number of different forms of profit (utilities) associated with the use of natural resources and ecosystem services. The evaluation data that have been gathered when analysed from a market preference perspective provide important evidence that can be used in making timely management decisions [4]. A specialised qualimetry tool developed in recent years enables more accurate estimates to be derived, expressed in both quantitative and qualitative factors. In this, we defer to the experience of Russian and foreign academics: A. Markandya, S.N. Bobilev, G. Dixon, O.E. Medvedev et al.

Our regional research into evaluating different types of natural resources and ecosystem services at the micro level, i.e. water, multi-purpose forestry use (as a source of timber and a recreational facility), hunting and fishing resources etc. [5] has confirmed the viability of such work and the considerable practical relevance of the results. It is clear that these evaluations are geographically specific, with the choice of method in each case determined by pragmatic considerations. The sequence of actions involves a number of steps: (1) Determining an evaluation attributable to natural resources and ecosystem services, as well as how they will be used; (2) Identifying environmental problems associated with such use, as well as determining potential adverse effects which will lower the value (cost) of natural resources and ecosystem services (or where there is a real threat of their depletion), together with a choice of evaluation methods; (3) Specifying the application of the chosen methods, taking regional geographical conditions into account.

Meanwhile, in their sequential and systematic development of the basic provisions and scientific tools for a socio-cultural methodology for environmental management, Cadaster Institute is giving particular attention to the humanisation of methodological principles in the implementation of economic valuations of natural resources and ecosystem services, and interpreting the derived data. This involves expanding the range of valued natural goods and ecosystem services by different categories of users of utilities, together with developing instruments of “understanding” as socio-cultural bases of evaluation indicators.

Extending the potential range for implementing appraisals of natural goods and ecosystem services and utilities can be achieved through a gradual and extremely prudent (given the risk of market distortion) inclusion of non-economic value indicators (socio-culturally driven and linked to categories of responsibility or obligation) within a system of economic evaluations [6]. In our view, it is not a question of creating brand new evaluation approaches, but rather a sequential shift towards the use of non-market evaluation methods – both direct and indirect- that, in practice, provide a real opportunity to take a specific (non-economic) value into account, making adjustments in market prices according to socio-cultural preferences of natural resource users in relation to individual natural resources and ecosystem services.

As with market prices, such estimates (with their broad application) are becoming an important feature of the geo-economic environment which: inform the identification of behavioural and socio-cultural motivation of natural resource users, provide an opportunity to assess the performance of environmental institutions, and analyse the features and trends in environmental institutional change.

The development and application of “understanding” instruments for socio-cultural bases for derived evaluation indicators, or, to be more precise, their institutional interpretation based on an understanding of knowledge, is a second, but no less important, element of humanising the methodology for an economic appraisal of natural resources and ecosystem services.

Without an understanding of the behavioural frameworks involved in formulating economic evaluation indicators that reflect the views of people living in particular areas on the economic value and social significance of individual natural resources and ecosystem services, as well as on the value of objects that have a natural and cultural history, it is impossible to properly interpret the results under real life conditions and so come up with meaningful conclusions that can be applied to current environmental practices. The most important element in such an analysis is the study of existing institutions operating in a particular region in relation to ownership in the environmental sector, as well as providing a socio-culturally driven range of acceptable environmental solutions for leading resource users. This will enable the socio-cultural features of countries, regions and local areas to be better understood and taken into account in the successful development of environmental regulation methods, and an a priori determination of the nearest countries from where environmental institutions can be borrowed and so be able to plan effective institutional change.

Developing a humanised methodology for economic evaluations of natural resources and ecosystem services involves the vital role of the micro-level, aided by “understanding knowledge” tools, through the aggregation of derived data. This is an excellent opportunity for undertaking comparative geographical research, as well as developing “behavioural maps”.

Methodological approaches being developed by Cadaster Institute are of great relevance in improving regional systems for environmental and economic accounting. Experience gained from our research confirms that the automatic transfer of even the most advanced external practices for implementing the System for Integrated Environmental Accounts (SEEA) won’t be successful without understanding the socio-cultural meaning of each indicator which reflects the relationship between regional populations and natural resources, e.g. water, forestry diversity etc. We believe that a study of natural resource use at the micro level that takes account of socio-cultural characteristics in a particular country or region should be a top priority and step in the development of an integrated environmental accounting system. This is the only way to guarantee the creation of a sound information framework within which effective solutions for the benefit of present and future generations can be made. Such a study will also inform efforts to improve the effectiveness of environmental monitoring standards in that it can contribute to a greater understanding of the reasons for natural resource depletion, particularly through public use.

The application of a humanised methodology for an economic appraisal of natural resources and ecosystem services that allows socio-cultural and non-economic values to be taken into account in management decisions will create the framework for agreeing applied tasks in the area of sustainable natural resource use, primarily through the development of effective regional planning and environmental engineering [7] projects in modern day conditions. Such a methodology also helps in reaching appropriate decisions in providing essential services to the population of particular regions, e.g. organising an efficient water supply system for urban and rural communities8. These derived indicators will help in creating and applying innovative environmental management mechanisms such as environmental ratings of regions and corporations, together with refinements to assessments of the value of investment projects etc. As a result, economic evaluations of natural resources and ecosystem services are beginning to fulfil the role of major economic and geographical indicators.

North D. Institutions, institutional changes in a functioning economy. Moscow, 1997.
Defining the economic value (cost) of natural resources and ecosystem services which is adjusted for non-economic values is based on the neo-classical economy of prosperity, which assesses the overall health and wellbeing of society and evaluates alternative projects or measures according to changes in the public’s state of wellbeing. In addition, new methods have emerged fairly recently which can help take non-economic values in an economic appraisal of natural resources and land into account.
The theory of marginal utility or marginal costs is a counterbalance to K. Marx’s idea of labour costs (therefore, hard to take root in Russia). This theory was developed by members of the Austrian school of economics, i.e., C. Menger, E. Boehm-Bawerk, F. von Wieser, Y. Schumpeter, together with L. Walras (The Lausanne School), W. S. Jevons and A, Marshall. According to the theory of marginal utility, the value of goods is determined by their marginal utility, based on subjective assessments of human demand. The marginal utility of a particular good represents the benefit that accrues from the last unit of the good, with the latter good having to satisfy the most insignificant of needs. A subjective value is a personal evaluation of a particular good by the consumer and vendor, while an objective value involves ratios and costs that are defined as part of market competition. With a gradual saturation in demand from the individual, the utility of things diminishes.
Turner, K., I. Bateman and D.W. Pearce (1993). Environmental Economics. Baltimore: John Hopkins Press; Pearce D., and A. Markandya (1989). Environmental Policy Benefits: Monetary Valuation. Paris, France: Organisation for Economic Cooperation and Development; Organisation for Economic Cooperation and Development (1995). The Economic Appraisal of Environmental Projects and Policies (Paris: Organisation for Economic Cooperation and Development).
An economic evaluation of natural resources and ecosystem services in Russian regions (Kaliningrad, Kostroma, Saratov, and Tomsk areas) Yaroslavl: Cadaster Institute, 2000; Monetary evaluation of natural resources in the Yaroslavl region. Yaroslavl: Cadaster Institute, 1996-97; Economic frameworks for conflict prevention in the natural resource use sector, using the Ob-Tomsk in-between rivers as an example. Yaroslavl: Cadaster Institute, 2000; Improving the economic performance of state-run national nature parks “Curonian Spit. Scientific report. Yaroslavl: Cadaster Institute, 2000; Testing the system of environmental economic accounting in the Ryazan region as the basis for sustainable natural resource use, and in exercising state control and oversight in the field of natural resource use. Yaroslavl: Cadaster Institute, 2005; Testing systems of environmental economic accounting in RSO-Analia as the basis for securing sustainable use of natural resources, and exercising effective Government control and oversight in the natural resource sector. Yaroslavl: Cadaster Institute, 2005; Environmental Economic Evaluation of natural resources and ecosystem services as the basis for the effective management of Specially Protected Areas and conservation of biodiversity (e.g. Sochi National Park), Yaroslavl: Cadaster Institute, 2006.
Fomenko G.A. Environmental management: A framework for a socio-cultural methodology. Moscow: Ministry of Sciences, 2004 (390 pp).
Developing a management plan for the state nature reserve “Stolby”, Yaroslavl: Cadaster Institute, 2012; Development of distribution charts highlighting the use and protection of hunting grounds in the Tomsk region, Yaroslavl: Cadaster Institute, 2012; Development of distribution charts highlighting the use and protection of hunting grounds in the Pskov region, Yaroslavl: Cadaster Institute, 2012; Development of distribution charts, use and protection of hunting grounds of the Orenburg region, Yaroslavl: Cadaster Institute, 2013.