Economic valuation of wetlands (1)

a reprint of the book published by the Ramsar Convention Secretariat in 1997

Copyright © Ramsar Convention Bureau, 1997. Published by the Ramsar Convention Bureau, Gland, Switzerland, with financial support from the United Kingdom Department of the Environment and the Swedish International Development Cooperation Agency.

Prepared in collaboration with the Department of Environmental Economics and Environmental Management of the University of York, the Institute of Hydrology, and IUCN-The World Conservation Union.

Reproduction of this publication for educational and other non-commercial purposes is authorised without prior permission from the copyright holder, providing that full acknowledgement is given. Reproduction for resale or other commercial purposes is prohibited without the prior written permission of the copyright holder.

Note: The designation of geographical entities in this book, and the presentation of the material, do not imply the expression of any opinion whatsoever on the part of the Ramsar Convention Bureau concerning the legal status of any country, territory, or area, or of its authorities, or concerning the delimitation of its frontiers or boundaries.

The opinions expressed by the authors in this publication do not necessarily represent the views of the Ramsar Convention Bureau, the University of York, the Institute of Hydrology, or IUCN.

Citation: Barbier, E. B., Acreman, M. C. and Knowler, D. 1996. Economic valuation of wetlands: a guide for policy makers and planners. Ramsar Convention Bureau, Gland, Switzerland.

Cover design: L'IV Communications S.A., 1110 Morges, Switzerland
Editing and layout: Dwight Peck and Valerie Higgins, Ramsar Convention Bureau, 1196 Gland, Switzerland
Printed by Imprimerie Dupuis S.A., 1348 Le Brassus, Switzerland

Available from: Ramsar Convention Bureau Rue Mauverney 28, 1196 Gland, Switzerland Fax: ++41 22 999 0169, e-mail: ramsar@ramsar.org or IUCN Publications Services Unit 219c Huntingdon Road, Cambridge CB3 0DL, UK Fax: ++44 1223 277175, e-mail: info@books.iucn.org.

Funding for this work was provided by the United Kingdom Department of the Environment and the Swedish International Development Cooperation Agency (Sida).

The concept for the book was developed by Dr Mike Acreman when he was with the IUCN Wetlands Programme (now part of the Ecosystem Management Group) which is led by Dr Jean-Yves Pirot.

A database of wetland valuation studies was established and initial ideas for the table of contents were proposed by Michele Beetham from the Department of Environmental Economics and Environmental Management at the University of York, while she was on placement with IUCN.

Comments on drafts of the text were provided by many individual specialists, especially Professor Kerry Turner (Centre for Social and Economic Research on the Global Environment, UK), Torsten Larsson (Swedish Environmental Protection Agency), Dr Robert K Davis (Ohio State University, USA), Dr Vilma Carande (Colorado State University, USA), Francis Grey (Australian Nature Conservation Agency), Dr Maria Zaccagnini (National Institute of Agricultural Technology, Argentina), various staff of IUCN (especially Frank Vorhies), the Ramsar Bureau, the UK Department of the Environment, the Department of Environmental Economics and Environmental Management at the University of York, UK and the Institute of Hydrology, UK.

Professor Kerry Turner and Gayatri Acharya (Department of Environmental Economics and Environmental Management, University of York) provided new information on the costs of undertaking valuation studies.

Production of the book by the Ramsar Bureau was coordinated by Mireille Katz; editing and layout were carried out by Dwight Peck and Valerie Higgins.

This publication contains much helpful information on various economic techniques that are available by which to value wetland areas. The Guide draws out the importance of weighing the advantages to be obtained by development with the damage which that development may do to wetlands.

The Guide is the result of considerable cooperation between scientists and economists, and I hope that it will be carefully studied as its primary purpose is that it should be practical.

Rt Hon the Earl Ferrers
Minister of State for the Environment and Countryside
United Kingdom

Today, most planning and development decisions are made on economic grounds and, more and more, on the basis of the forces at play in the free-market system. While this new paradigm has its own limitations and dangers, it would be unrealistic to ignore it and to base our quest for the conservation and wise use of wetlands on a completely different set of values. Hence, wetland goods and services must be given a quantitative value if their conservation is to be chosen over alternative uses of the land itself or the water which feeds the wetlands.

For many products, such as fish or timber, there is a world market which allows easy calculation of the worth of the wetland. The value of wetland functions, such as water quality improvement, may be calculated from the cost of building a treatment works to perform the same processes. It is much more difficult, however, to value biodiversity or the aesthetic beauty of wetlands, as the market for such "products" is much more elusive and their economic valuation much more difficult to achieve with traditional methods. Another major hurdle is that developing countries face significant problems in appropriating the global benefits of wetland conservation, such as their biological diversity (Pearce & Moran, 1994). Consequently, new means of appropriation must be developed and added to.

At its meeting in Brisbane, Australia, in March 1996, the Conference of the Parties to the Convention on Wetlands approved a Strategic Plan that recognises the importance and urgency of carrying forward the work in the area of economic valuation of wetlands. According to Operational Objective 2.4 of the Strategic Plan, the Ramsar Convention will promote the economic valuation of wetland benefits and functions through dissemination of valuation methods. This book sets out to provide guidance to policy makers and planners on what the potential is for economic valuation of wetlands and how valuation studies can be undertaken. Since it is not expected that policy makers will undertake the valuation work themselves, guidance on planning a study and outline Terms of Reference for technical consultants are provided as well.

Throughout human history, the term wetlands conjured up for many people a swamp full of slimy creatures, harbouring diseases such as malaria and schistosomiasis. Indeed it is this view of wetlands as wastelands that has led to extensive drainage and conversion of wetlands for intensive agriculture, fish ponds, industrial or residential land or to improve public health. However, in recent years there has been increasing awareness of the fact that natural wetlands provide free of charge many valuable functions (e.g., flood alleviation, groundwater recharge, retention of pollutants), products (e.g., fish, fuelwood, timber, rich sediments used for agriculture in the floodplains, tourist attractions), and attributes (biodiversity, aesthetic beauty, cultural heritage and archaeology).

The trend towards wetland conservation is exemplified by the many countries that have adopted the policy that there should be no further wetland loss or degradation, that wetlands must be used in a sustainable way and research should be undertaken on quantifying wetland values. International mechanisms and institutions, such as the Ramsar Convention on Wetlands, the Convention on Biological Diversity, the UN Commission on Sustainable Development, OECD, IUCN-The World Conservation Union, Wetlands International and WWF are promoting research, analysis and dissemination of information on economic valuation of natural systems, including wetlands. They advise that decision-makers should fully consider the social benefits of natural ecosystems as well as those of the development proposals being considered and that they should make full use of the available techniques for accurately expressing resource benefits in economic terms.

It is important to stress that economic valuation is not a panacea for all decisions, that it represents just one input into the decision-making process, along with important political, social, cultural and other considerations. The goal of this text is to assist planners and decision-makers in increasing the input from economic valuation in order to take the best possible road towards a sustainable future.

The aim of this book is to provide guidance to policy makers and planners on the potential for economic valuation of wetlands and how such valuation studies should be conducted. Although a number of economic valuation studies of wetlands have been undertaken around the world and economists have developed methodologies for valuing more intangible aspects of the environment, such as amenity or aesthetic factors, no one has synthesised from this literature a common approach to show its overall usefulness to wetland management worldwide. Consequently, this book provides details of the various techniques and examples of wetland valuation studies together with guidance on planning and managing a study and putting the result into a wider decision-making framework.

Wetlands are amongst the Earth's most productive ecosystems. They have been described both as "the kidneys of the landscape", because of the functions they perform in the hydrological and chemical cycles, and as "biological supermarkets" because of the extensive food webs and rich biodiversity they support. In Chapter 1, the features of the system are grouped into components (soil, water, plants and animals), functions (nutrient cycling and groundwater recharge) and attributes (biological diversity). Historically, many wetlands have been treated as wastelands and drained or otherwise degraded. The Ramsar Convention on Wetlands of International Importance was created to promote the conservation of wetlands and their wise use and management.

Chapter 2 explains the role of valuation in decision-making. Many development decisions are made on economic grounds. By providing a means for measuring and comparing the various benefits of wetlands, economic valuation can be a powerful tool to aid and improve wise use and management of global wetland resources. In the past, wetlands have been undervalued because many of the ecological services, biological resources and amenity values they provide are not bought and sold and hence are difficult to price. Ramsar is promoting new methods of economic valuation to demonstrate that wetlands are valuable and should be conserved and wisely used.

In Chapter 3, an appraisal framework is developed for assessing the net economic benefits of various wetland use options. Stage one of the framework involves determining the overall objective or problem and choosing the correct economic assessment approach from three broad categories, i.e., impact analysis, partial valuation or total valuation. Stage two requires definition of the scope and limits of the analysis and the information required for the chosen assessment approach. Stage three necessitates determining the evaluation techniques and data collection methods required for the economic appraisal including any analysis of distributional impacts.

To guide the policy maker on how to undertake a wetland valuation study, six examples are given in Chapter 4. These are: the Hadejia-Nguru floodplain in northern Nigeria; prairie wetlands in North America; the Norfolk Broads and Scottish flow country in the UK; nitrogen abatement using Swedish wetlands; coastal wetlands in southeastern USA and mangrove conservation in Indonesia. These case studies provide practical demonstrations of the use of various valuation methods in the field, in different types of wetlands, using a range of valuation methods and covering diverse geographical areas. Although their coverage cannot be claimed as exhaustive, several observations emerge from reviewing these studies. First, the importance of integrating ecological and economic approaches is critical, especially when the valuation of ecological functions is the objective. This requires more than complex mathematical techniques, but extends to continual collaboration between economists and ecologists. The studies also demonstrate that valuation should not be conceived of as an end in itself, but needs to be directed towards some policy issue. These issues may range from simply raising awareness of the importance of wetlands to choices among alternatives to meet some stated policy goal, with protecting wetlands representing just one option.

Chapter 5 provides guidance on planning and conducting a study. These include a seven-step guide to undertaking a study. The steps are: choosing the appropriate assessment approach; defining the wetland area; identifying and prioritising components, functions and attributes; relating these components, functions and attributes to use value; identifying and obtaining information required for assessment; quantifying the economic values; and putting the economic values in the appropriate framework (e.g., cost-benefit analysis). Guidance is also given on resources needed and on compiling Terms of Reference for technical consultants using a fictitious example of a floodplain in Africa. In addition, emphasis is placed upon the need to consider other factors (political, social, historical or ecological), which may be considered alongside the economic valuation results when a decision is being made. Finally, an alternative methodology for decision-making is presented where rare species are at risk.

In Chapter 6, recommendations are made for future actions. These highlight the need to: undertake site-specific economic valuation studies; ensure appropriate interdisciplinary collaboration; provide training and institutional capacity building; undertake research on economic valuation theory and practice; and establish networks for the exchange of ideas and experience of applying valuation methods.

After the main text there is a glossary of terms, a list of references and further reading. The appendices contain details of different wetland components, functions and products; a table comparing economic appraisal methods; and a table detailing advantages and disadvantages of valuation techniques used in the economic appraisal of wetlands.

It is clear, when you are up to your knees in mud in a backwater swamp in Zambia, that it is truly a wetland. But trying to draw experiences together to provide a precise definition of wetlands is fraught with controversy and difficulty, because of the enormous variety of wetland types and the problems of defining their boundaries. For example, how often and for how long does land have to be flooded before it is considered a wetland? The problems are compounded by the fact that many wetlands evolve over time, starting as open water, but infilling with sediment and vegetation eventually to become dry land. Nevertheless, wetlands certainly occupy the transitional zones between permanently wet and generally dry environments – they share characteristics of both environments yet cannot be classified unambiguously as either aquatic or terrestrial. The key is the presence of water for some significant period of time, which changes the soils, the microorganisms and the plant and animal communities, such that the land functions in a different way from either aquatic or dry habitats.

Fortunately, some pragmatic help is at hand. Some 100 countries have adopted a definition by signing the Ramsar Convention on Wetlands of International Importance (see section 1.5). The Convention adopts an extremely broad approach in determining the ‘wetlands’ which come under its aegis. In the text of the Convention (Article 1.1), wetlands are defined as:

As a result of these provisions, the coverage of the Convention extends to a wide variety of habitat types, including rivers, shallow coastal waters and even coral reefs, but not deep sea.

In trying to categorise the wide range of wetlands encompassed by the Ramsar definition, Scott (1989) defined 30 groups of natural wetlands and nine manmade ones. However, for illustrative purposes it is possible to identify five broad wetland systems:

The importance of wetlands has changed with time. Back in the swampy environments of the Carboniferous Period, some 350 million years ago, wetlands produced and preserved many of the fossil fuels (coal and oil) upon which we depend today. More recently, wetlands along some of major rivers of the world, including the Tigris, Euphrates, Niger, Nile, Indus and Mekong, nurtured the great civilisations of history. These wetlands provided fish, drinking water, pasture land and transport and were part of the cultural history of early people, being a central element of mythology, art and religion.

As scientific understanding of wetlands has increased, more subtle goods and services have become apparent. Wetlands have been described both as "the kidneys of the landscape", because of the functions they can perform in the hydrological and chemical cycles, and as "biological supermarkets" because of the extensive food webs and rich biodiversity they support (Mitsch & Gosselink, 1993).

Wetlands are among the Earth’s most productive ecosystems. The features of the system may be grouped into components, functions and attributes. The components of the system are the biotic and non-biotic features which include the soil, water, plants and animals. The interactions between the components express themselves as functions, including nutrient cycling and exchange of water between the surface and the groundwater and the surface and the atmosphere. The system also has attributes, such as the diversity of species.

Wetland systems directly support millions of people and provide goods and services to the world outside the wetland. People use wetland soils for agriculture, they catch wetland fish to eat, they cut wetland trees for timber and fuelwood and wetland reeds to make mats and to thatch roofs. Direct use may also take the form of recreation, such as bird watching or sailing, or scientific study. For example, peat soils have preserved ancient remains of people and trackways which are of great interest to archaeologists.

Apart from using the wetlands directly, people benefit from wetland functions or services. As flood water flows out over a floodplain wetland, the water is temporarily stored; this reduces the peak river level and delays the time of the peak, which can be a benefit to riparian dwellers downstream. As mangrove wetlands reduce wave energy, they protect coastal communities, and as wetlands recycle nitrogen, they improve water quality downstream. By benefiting in this way, people are making indirect use of the wetland functions. These functions may be performed by engineering schemes such as dams, sea walls or water treatment plants, but such technological solutions are normally more expensive than when performed by wetlands.

Not all wetlands, however, perform all of these hydrological functions to the same extent, if at all. Indeed, some wetlands perform hydrological functions which may be contrary to human needs, such as riparian wetlands which may act as runoff generating areas, thus increasing flood risk downstream. It is therefore crucial to quantify the functions of a wetland before valuing it.

The mere existence of wetlands may be of great significance to some people. Those who have grown up in wetlands, but have moved away to a town, may have placed a high value on the wetland because it is part of their cultural heritage, even though they may never visit the wetland.

Further details of wetland components, functions and attributes are provided in Appendix 1, while Chapter 2 discusses these in an economic valuation context.

Wetlands are dynamic systems, continually undergoing natural change due to subsidence, drought, sea-level rise, or infilling with sediment or organic material. Thus, many wetlands are only temporary features of the landscape and will be expected to change and eventually disappear, whilst new wetlands are created elsewhere. Direct and indirect human activity has considerably altered the rate of change of wetlands. To some degree, we have created new artificial wetlands by building reservoirs, canals and flood storage areas. However, the loss of wetlands has far outstripped the gains.

The view that wetlands are wastelands, resulting from ignorance or misunderstanding of the value of the goods and services available, has led to their conversion to intensive agricultural, industrial or residential uses. Individual desires of farmers or developers have been supported by government policy and subsidies. In addition to direct action on the land, river engineering schemes have diverted water away from wetlands, as it has been believed that this water is wasted in the wetland or at least has a lower value than its use for rice irrigation upstream. Some organisations still look upon wetlands only in terms of their potential to provide farm land to feed an ever-expanding population, which normally requires alteration of the natural system. Wetlands may also be lost by pollution, waste disposal, mining or groundwater abstraction.

Country	Period	% loss of wetlands
Netherlands	1950-1985	55
France	1900-1993	67
Germany	1950-1985	57
Spain	1948-1990	60
Italy	1938-1984	66
Greece	1920-1991	63

The amount of wetland lost is difficult to quantify, since the total area of wetland in the world is uncertain. There are, however, some figures for individual countries which indicate the scale of the problem. The United States has lost some 87 million hectares (54%) of its original wetlands (Tiner, 1984), primarily to agricultural production. Figures for wetland loss in six European countries are given in Table 1.1 (CEC, 1995), whilst in Portugal some 70% of the Western Algarve has been converted for agriculture and industrial development (Pullan, 1988). The European Union policy is that there should be no further wetland loss or degradation. In the Philippines, some 300,000 hectares (67%) of the country’s mangrove resources were lost in the 60 years from 1920 to 1980 (Zamora, 1984).

Table 1.2 Incidence of major threats to wetlands in Asia, Latin America and the Caribbean (WCMC, 1992), expressed as % of sites.

.	Asia	Latin America and Caribbean
Hunting and associated disturbance	32	30.5
Human settlement	27	.
Drainage for agriculture	23	19
Disturbance from recreation	.	11.5
Reclamation for urban and industrial development	.	10.5
Pollution	20	31
Fishing and associated disturbance	19	10
Commercial logging and forestry	17	10
Wood cutting for domestic use	16	.
Catchment degradation, soil erosion, siltation	15	.
Conversion to aquacultureponds or salt pans	11	.
Diversion of water	9	.
Over-grazing by domestic stock	9	.

A wetland does not need to be entirely lost to reduce its value. Gamelsrød (1992) showed that production of shrimps on the Sofala Bank in Mozambique is related to wet season runoff from the Zambezi. With the building of major dams along the river, runoff and hence shrimp numbers have decreased. He calculates that earnings from shrimp fishing could be increased by US$ 10 million per year by correctly releasing water from the Cabora Bassa dam which is not being utilised.

There are now many cases of wetland restoration, where the results of wetland degradation have been recognised. Making artificial releases from dams to re-inundate degraded floodplains is one mechanism (Acreman, 1994), of which there are examples on the rivers Senegal, Kafue (Zambia), Logone (Cameroon) and Phongolo (South Africa) (Acreman & Hollis, 1996). Nevertheless, these are exceptions rather than the rule and predictions suggest that pressure to "develop" wetlands is intensifying, especially in Asia, Africa and Latin America. Thus, there is still a great need for promoting the benefits of wetlands to encourage conservation and sustainable utilisation, through organisations such as IUCN-The World Conservation Union and the Ramsar Convention.

The Convention on Wetlands of International Importance especially as Waterfowl Habitat – commonly referred to as the Ramsar Convention from its place of adoption in Iran in 1971 – was the first of the modern global intergovernmental treaties on conservation and wise use of natural resources.

The mission of the Ramsar Convention (Ramsar, 1996) is "the conservation and wise use of wetlands by national action and international cooperation as a means to achieving sustainable development throughout the world".

The Convention provides a framework for international cooperation and was established following concern in the 1960s about the serious decline in populations of waterfowl (mainly ducks). It came into force in 1975 and currently has 100 Contracting Parties, which are obliged to undertake four main activities. These are:

In this way the Convention plays an important role in helping to prevent detrimental changes to wetland sites in states that are party to the Convention. Technical support on wetland conservation is provided to the Convention from organisations such as IUCN-The World Conservation Union and Wetlands International (a new body formed from the International Waterfowl and Wetland Research Bureau, the Asian Wetland Bureau and Wetlands for the Americas). Notable successes include:

The Ramsar Convention is thus vitally important in the conservation of the world’s wetlands.

To understand why economic valuation may be important to wetland management and policy, it is necessary first to review the role of valuation in decisions that concern the use of environmental resources generally and wetlands specifically. In this chapter we suggest that a major reason for excessive depletion and conversion of wetland resources is often the failure to account adequately for their non-market environmental values in development decisions. By providing a means for measuring and comparing the various benefits of wetlands, economic valuation can be a powerful tool to aid and improve wise use and management of global wetland resources.

We can define economic valuation as the attempt to assign quantitative values to the goods and services provided by environmental resources, whether or not market prices are available to assist us. However, such a definition goes only part way. We must be more specific about what economists mean by the term value. The economic value of any good or service is generally measured in terms of what we are willing to pay for the commodity, less what it costs to supply it. Where an environmental resource simply exists and provides us with products and services at no cost, then it is our willingness to pay alone which describes the value of the resource in providing such commodities, whether or not we actually make any payment.

Why then value environmental resources? The answer to this question is that although we know intuitively that such resources may be important, this may not be enough if we are to ensure their wise use. Many environmental resources are complex and multifunctional, and it is not obvious how the myriad goods and services provided by these resources affect human welfare. In some cases, it may be worthwhile to deplete or degrade environmental resources; in others, it may be necessary to ‘hold on’ to these resources. Economic valuation provides us with a tool to assist with the difficult decisions involved.

Loss of environmental resources is an economic problem because important values are lost, some perhaps irreversibly, when these resources are degraded or lost. Each choice or option for the environmental resource – to leave it in its natural state, allow it to degrade or convert it to another use – has implications in terms of values gained and lost. The decision as to what use to pursue for a given environmental resource, and ultimately whether current rates of resource loss are ‘excessive’, can only be made if these gains and losses are properly analysed and evaluated. This requires that all the values that are gained and lost under each resource use option are carefully considered.

For example, preserving an area in its natural state involves direct costs of preservation for setting up a protected area, and in developing countries this may include paying guards and rangers to protect and maintain the area and perhaps the cost of establishing a ‘buffer zone’ for surrounding local communities. Development options are sacrificed if preservation is chosen, and these foregone development benefits are additional costs associated with the preservation option. Such costs are easily identifiable as they often comprise marketable outputs and income sacrificed (e.g., fisheries’ revenue or subsistence agricultural income, in the case of wetlands). It is not surprising therefore that governments and donors usually consider the total costs – the direct costs plus the foregone development benefits – of preservation when choosing to retain an environmental resource in its natural or a managed state.

But the same approach should be taken in evaluating the development options for the environmental resource. For example, if the environmental resource is to be converted to some other use, not only should the direct costs of conversion be included as part of the costs of this development option but so must the foregone values that the converted resource can no longer provide. These may include the loss of both important environmental functions and, in the case of complex resource systems such as wetlands, many important biological resources and amenity values as well. Unfortunately, many of these values of the natural or managed environmental resource are not bought and sold on markets, and thus are generally ignored in private and public development decisions.

For example, the market value of environmental resources converted to some commercial use may fail to reflect the lost environmental benefits. Development decisions are therefore often biased in favour of those uses of environmental resources which do have marketed outputs. Thus, the failure to account more fully for the economic costs of conversion or degradation of environmental resources is a major factor behind the design of inappropriate development policies. The result is too much conversion and over-exploitation of environmental resources. As this failure is endemic in private and public decisions concerning the use of environmental resources – particularly wetland resources – it is necessary to assess more fully the net economic benefits arising from different wetland uses.

Valuation is only one element in the effort to improve management of environmental resources such as wetlands. At the same time, decision-makers must take account of many competing interests in deciding how best to use wetlands. Economic valuation may help inform such management decisions, but only if decision-makers are aware of the overall objectives and limitations of valuation.

The main objective of valuation in assisting wetland management decisions is generally to indicate the overall economic efficiency of the various competing uses of wetland resources. That is, the underlying assumption is that wetland resources should be allocated to those uses that yield an overall net gain to society, as measured through valuation in terms of the economic benefits of each use less its costs [note 1]. Who actually gains and loses from a particular wetland use is not part of the efficiency criterion per se. Thus a wetland use showing a substantial net benefit would be deemed highly desirable in efficiency terms, even though the principal beneficiaries may not necessarily be the ones who bear the burden of the costs arising from the use. If this is the case, then this particular wetland use may be efficient but it may also have significant negative distributional consequences. It is therefore often important that many proposed wetland investments or management policies are assessed not only in terms of their efficiency but also their distributional implications.

Economic valuation is also not a panacea for decision-makers making difficult choices concerning the management of wetland resources. Too often, decision-makers have already decided on what wetland management strategy to pursue, whether conversion or conservation, and simply want economic valuation to confirm this choice ex post facto. In such circumstances, valuation has done little to inform the decision-making process and essentially serves no purpose. At the other extreme, sometimes decision-makers ask the impossible from economic valuation. A major difficulty facing valuation of a complex environmental system such as wetlands is insufficient information on important ecological and hydrological processes that underpin the various values generated by the wetlands. If this information is lacking – which is often the case for many non-market environmental values that may be deemed important to value – then it is incumbent upon the analysts conducting the valuation to provide realistic assessments of their ability to value key environmental benefits. Equally, decision-makers must realise that under such circumstances valuation cannot be expected to provide realistic estimates of non-market environmental values – not, at least, without further investment of time, resources and effort in further scientific and economic research.

Finally, economic valuation is concerned ultimately with the allocation of wetland resources to improve human welfare. Consequently, the various environmental benefits of wetlands are measured in terms of their contribution to providing goods and services of value to humanity. However, some members of society may argue that certain wetland systems and the living resources they contain may have an additional ‘preeminent’ value in themselves beyond what they can provide in terms of satisfying human preferences or needs. From this perspective, preserving wetland resources is a matter of moral obligation rather than efficient or even fair allocation. There may be other motivations for managing wetlands in particular ways, such as political considerations. Thus, economic values represent just one input into decision-making, alongside important other considerations. The goal of this text is to assist planners and decision-makers with increasing the input from economic valuation in decision-making.

If researchers are to value wetland uses and decision-makers are to take these into account when making policies that affect wetlands, then a framework for distinguishing and grouping these values is required. The concept of total economic value (TEV) provides such a framework and there is an increasing consensus that it is the most appropriate one to use. Simply put, total economic valuation distinguishes between use values and non-use values, the latter referring to those current or future (potential) values associated with an environmental resource which rely merely on its continued existence and are unrelated to use (Pearce and Warford, 1993). Typically, use values involve some human ‘interaction’ with the resource whereas non-use values do not. The total economic valuation framework, as applied to wetlands, is illustrated in Table 2.1.

Use values are grouped according to whether they are direct or indirect. The former refers to those uses which are most familiar to us: harvesting of fish, collection of fuelwood and use of the wetlands for recreation (Table 2.1 lists several others as well). Direct uses of wetlands could involve both commercial and non-commercial activities, with some of the latter activities often being important for the subsistence needs of local populations in developing countries or for sport and recreation in developed countries. Commercial uses may be important for both domestic and international markets. In general, the value of marketed products (and services) of wetlands is easier to measure than the value of non-commercial and subsistence direct uses. As noted above, this is one reason why policy makers often fail to consider these non-marketed subsistence and informal uses of wetlands in many development decisions.

In contrast, various regulatory ecological functions of wetlands may have important indirect use values. Their values derive from supporting or protecting economic activities that have directly measurable values. The indirect use value of an environmental function is related to the change in the value of production or consumption of the activity or property that it is protecting or supporting. However, as this contribution is unmarketed, goes financially unrewarded and is only indirectly connected to economic activities, these indirect use values are difficult to quantify and are generally ignored in wetland management decisions.

For example, the storm protection and shoreline stabilisation functions of a wetland may have indirect use value through reducing property damages, yet often coastal or riverine wetland systems are drained in order to build still more waterfront property. Mangrove systems are known to be breeding grounds and nurseries for shrimp and fish that are essential for coastal and marine fisheries, yet these important habitats are currently being converted rapidly in many regions for aquaculture, particularly shrimp ponds. Natural floodplains may recharge groundwater used for dryland agriculture, grazing livestock and domestic or even industrial use, yet many of these floodplains are threatened by dams and other barrages diverting water for upstream irrigation and water supply.

A special category of value is option value, which arises because an individual may be uncertain about his or her future demand for a resource and/or its availability in the wetland in the future. In most cases, the preferred approach for incorporating option values into the analysis is through determining the difference between ex ante and ex post valuation [note 2]. If an individual is uncertain about the future value of a wetland, but believes it may be high or that current exploitation and conversion may be irreversible, then there may be quasi-option value derived from delaying the development activities. Quasi-option value is simply the expected value of the information derived from delaying exploitation and conversion of the wetland today. Many economists believe that quasi-option value is not a separate component of benefit but involves the analyst in properly accounting for the implications of gaining additional information [note 3].

In contrast, however, there are individuals who do not currently make use of wetlands but nevertheless wish to see them preserved ‘in their own right’. Such an ‘intrinsic’ value is often referred to as existence value. It is a form of non-use value that is extremely difficult to measure, as existence values involve subjective valuations by individuals unrelated to either their own or others’ use, whether current or future. An important subset of non-use or preservation values is bequest value, which results from individuals placing a high value on the conservation of tropical wetlands for future generations to use. Bequest values may be particularly high among the local populations currently using a wetland, in that they would like to see the wetland and their way of life that has evolved in conjunction with it passed on to their heirs and future generations in general. While there are few studies of non-use values associated with wetlands (see the case study involving the UK’s Norfolk Broads in Section 4.3 for one example), campaigns by European and North American environmental groups to raise funds to support tropical wetlands conservation hint at the magnitudes involved [note 4]. For example, several years ago the UK’s Royal Society for the Protection of Birds (RSPB) collected £500,000 (US$ 800,000) from a one-off membership mailing campaign to help save the Hadejia-Nguru wetlands of Northern Nigeria in West Africa [note 5].

2.3 Why wetland resources and systems are undervalued in development decisions

In sum, wetland resources are particularly susceptible to misallocation decisions because of the nature of the values associated with them. Wetlands are multifunctional resources par excellence. Not only do they supply us with a number of important resource outputs (e.g., fish, fuelwood, wildlife), but they also perform an unusually large number of ecological functions which support economic activity. Many of these latter services are not marketed; that is, they are not bought and sold because the support they provide to economic activity is indirect and therefore largely goes unrecognised. In the case of tropical wetlands, many of the subsistence uses of wetland resources are also not marketed and are thus often ignored in development decisions.

Some of the ecological services, biological resources and amenity values provided by wetlands have the qualities of what economists call a public good, so that it would be virtually impossible to market the service, even if this were desired [note 6]. For example, if a wetland supports valuable biodiversity, all individuals potentially benefit from this service, and no one individual can be excluded from the service. Such situations make it extremely difficult to collect payment for the service, since whether you pay or not, you may still reap the benefit. In such circumstances, wetland services are liable to be undervalued.

Some of the difficulty arising from the public good qualities of wetland values would be unimportant if all wetland benefits could be enjoyed simultaneously, without any conflict among the various uses. Aggregating all possible use values together in such an unfettered multiple-use situation would be more likely to lead to recognition of the importance of conserving a wetland in its natural or a semi-natural state. However, amongst many wetland uses there are inherent conflicts or tradeoffs, even when the wetland is maintained in a more-or-less natural state (Turner, 1991). For instance, it may not be possible to manage a wetland for recreation or commercial fishing while at the same time using it for waste-water treatment. Even if the latter use is more valuable, its non-market and public good properties mean that its value is unlikely to be reflected in market decisions automatically. If public policy is to allow individuals responding to market signals to determine the allocation of wetland uses – the so-called ‘free market’ solution – then it is unlikely that the wetland will be used for waste-water treatment. Thus, the resulting ‘undervaluing’ of a key ecological service may once again lead to inappropriate wetland uses.

A wetland and its resources may also be undervalued and thus misallocated because of the property rights regime governing wetland access and use. For example, the wetlands in question may be subject to open access, where no rules apply and use of its resources may be open to all and unregulated. Alternatively, informal and traditional arrangements may govern their use as communal or common property resources. Finally, state or private property may characterize the wetland resource base (Bromley, 1989). Each form of property rights may be characterized by quite distinct conditions of resource exploitation. For instance, open-access resources are often over-harvested, so observed use values may be very low. As a result, if attempts to value environmental resources are based on simple observations of current use rates, without taking into consideration the institutional context, they may undervalue the resource. This may be especially important if the institutional arrangement is changing informally, as when indigenous common property systems are reasserted after a period of dormancy, or a change has been mandated as an element in a project or programme affecting a wetland area, as when land is suddenly privatized or nationalized.

Undervaluing of wetlands can be a serious problem when outright conversion of the wetland area is at stake. As noted in previous sections, development or conversion of the wetland tends to produce marketable outputs, while maintaining the wetland in a natural or managed state usually leads to the preservation of non-market goods and services [note 7]. Such a dichotomy often results in the development option – i.e., conversion to agriculture, fish ponds, and commercial or residential property – being widely regarded as the most valuable wetland use. As such activities also generate additional government revenue, it is not surprising that decision-makers also support the conversion of wetlands to ‘commercial’ uses.

Even where revenues may not be the primary objective of wetland exploitation and conversion, agriculture, aquaculture, property development and other conversion activities are generally considered important for economic development and regional growth. They are seen as having significant ‘linkages’ to other sectors, especially processing and construction, and can provide much-sought-after jobs in regions with few other industrial alternatives. These are compelling arguments for planners and decision-makers in many countries for supporting wetland conversion at the expense of other wetland values. In contrast, non-marketed ecological functions and amenity values generated by natural or managed wetlands may create little in the way of spinoff benefits, and instead may even substitute for employment-generating activities (e.g., water treatment, flood control and storm protection) or require additional investments of scarce public resources (e.g., tourist facilities and roads for recreational uses). Some wetlands may also generate negative external effects in the form of support for disease vectors such as malaria-carrying mosquitoes which may be recognised while other indirect support functions are ignored.

In sum, the undervaluing of wetland resources and functions is a major reason why wetland systems are misallocated – often to conversion or exploitation activities yielding immediate commercial gains and revenues. Economic valuation may provide decision-makers with vital information on the costs and benefits of alternative wetland use options that would otherwise not be taken into account in development decisions. In Chapter 3, we provide a general appraisal framework for wetland valuation that assists decision-makers in assessing the net economic benefits of alternative wetland use options.

A key concept underlying the principles of the Ramsar Convention is that wetlands have great value. Conservation can only be achieved if wetlands can be shown to be of value and, in some cases, of greater value than proposed alternative uses of the wetland site itself or of the water feeding the wetland. In line with this, Contracting Parties are asked to provide physical and social values of wetlands as part of the information for designation on the List of Wetlands of International Importance. Contracting Parties are also committed to making environmental impact assessments, before initiating schemes that might affect wetlands, which should pay particular attention to maintaining the values of wetlands.

To support the Contracting Parties in this endeavour, the Convention intends to promote the development, wide dissemination and application of documents which give guidance on the economic valuations of the goods and services of wetlands as part of the implementation of its Strategic Plan, 1997-2002. This document thus provides specific guidance on economic valuation techniques and on the use of valuation studies in national wetland policies, regional plans, environmental impact assessments and river basin management.

In this chapter, we develop a general framework for assessing the net economic benefits of alternative uses of wetlands [note 8]. Ideally any assessment ought to lead to an economic valuation of all benefits and costs associated with each wetland use option that is to be evaluated. The assessment methodology developed here is consistent with the economic technique of cost-benefit analysis. However, given that data limitations often constrain the analyst’s ability to value many environmental functions and resources, it will be necessary to adapt the assessment methodology in such circumstances to provide the best information possible to aid decision-making. Appendix 2 provides a description of alternative assessment methodologies, including cost-effectiveness analysis, multi-criteria analysis and others.

One approach not discussed in Appendix 2 is a Safe Minimum Standard (SMS) decision rule. This technique has relevance where the fate of highly unique wetland resources may be at stake and caution may be advised to avoid potentially large irreversible losses to society (see Box 3.1). Obviously, not all wetland management problems warrant the use of SMS, but when they do, analysts can modify the standard cost-benefit analysis approach accordingly. Regardless of the method selected, an interdisciplinary approach will be needed at virtually all stages in the assessment, and this should particularly involve collaboration between economists and ecologists. Figure 3.1 summarises the overall assessment framework for economic evaluation of wetlands [note 9].

Box 3.1 Applying the precautionary principle to wetland management decisions

Where decisions about the loss of unique ecosystem resources or attributes, such as biodiversity, involve uncertainty, alternatives to the standard cost-benefit analysis may be desirable. Such decision rules must recognise that we are not fully knowledgeable about the potential costs and benefits of wetland use or conversion, nor of their probabilities of occurrence. Although such information might be forthcoming as time passes, it is not available now, and yet important decisions about the conversion or conservation of highly unique wetland resources must be made in the interim. Preference for a risk-averse decision rule (erring on the side of caution) in such situations calls for application of the precautionary principle. In effect, employing such a management decision rule suggests that society may be willing to pay a premium for the conservation of resources whose full value may not yet be known or appreciated, in the same sense that we purchase insurance protection as individuals. In this case, society may wish to take the steps necessary to preserve important wetland resources as long as the cost or "premium" is not too high. Determining just what this limit might be is not easy, but is liable to involve a least-cost perspective. Use of the precautionary principle is evident in such international agreements as the Montreal Protocol on substances likely to damage the ozone layer or the Declaration of the Third Ministerial Conference on the North Sea with respect to the dumping of potentially toxic materials (O’Riordan and Cameron, 1994).

The argument for applying a precautionary principle hinges on the dilemma that at present we do not know the risks or magnitudes of potential losses from doing nothing. We can guess that these may be quite large and that we might miss out on significant benefits or incur severe losses if key wetland resources are not conserved. Thus, it is argued that the burden of proof should be shifted to those who would argue against a safe level of conservation of important wetlands. Stated in this way, we could view the opportunity costs of delaying or prohibiting conversion of highly unique wetlands as part of the insurance premium which we would be willing to pay to conserve these wetlands for the future.

When we do not know the likelihood or magnitude of losses associated with conversion of a wetland, we must seek alternative assessment methods to replace or supplement the standard cost-benefit analysis approach (Tisdell, 1990). One particular approach consistent with the precautionary principle is the safe minimum standard of conservation, originating with Ciriacy-Wantrup (1952). The term originally referred to a conservation strategy applicable to wild species with a critical threshold population size below which they could not recover (minimum viable population). Its aim was to ensure that at least this minimum population size was maintained as long as the cost of doing so was not intolerably high. Such an approach could equally be applied to unique wetland resources, especially if it is used in association with conventional cost-benefit analysis (Tisdell, 1990). The SMS is usually presented as a decision technique making use of game theory which adapts easily to situations where the probability of gains and losses are not known (Bishop, 1978; Ready and Bishop, 1991). Game theory therefore provides a useful framework for analysing problems involving highly unique wetlands.

The first stage is necessary to determine the correct assessment approach required for the particular wetland that is to be evaluated. The second is to determine the information needs for carrying out the selected assessment approach. The third is the choice of appropriate economic appraisal methods and valuation techniques. The completion of all three stages of the analysis should yield an economic evaluation of the wetland that will indicate to policy makers whether that option should proceed or not.

Although the three stages in the analysis have the appearance of being sequential, which is also the impression given in Figure 3.1, actual implementation of the assessment should involve an iterative, or ‘feedback’, process. That is, at any stage in the analysis, it may be necessary to return to a previous stage in order to revise the assessment process, improve the analysis, redefine information needs, and so forth. Several such iterations may be necessary before the economic evaluation can be successfully concluded.

The aim of the three-stage process outlined in Figure 3.1 is an economic assessment of wetland values. All wetland values assessed should reflect the true ‘willingness to pay’ by society for their benefits. This will require determining the true economic value of benefits that are essentially non-marketed and adjusting the market prices of some wetland goods and services for distortions caused by government policies or market imperfections. However, in some instances, data and resource constraints may limit the analysis to a financial assessment. Only marketed goods and services can be valued, through the use of ‘unadjusted’ market prices.

In either case, it is normal practice to discount annual values to a present value figure. This requires the analyst to select a discount rate (see Box 3.2). In some cases, the analysis may be limited to just a physical assessment. Neither financial nor economic values are possible to determine, but one may be able to indicate the physical changes in the goods and services provided by the wetlands or in any environmental impacts. In the discussion that follows, three stages of the appraisal process are illustrated by assuming that a full economic assessment is the ultimate objective.

The first stage in the evaluation process is to determine the overall objective or problem. As indicated in Figure 3.1, the type of economic assessment approach chosen will depend directly on the problem confronting the analyst.

Three broad categories of issues are of most relevance to the economic analysis of wetlands. Corresponding to each of these three evaluation objectives would be a specific economic assessment approach. As shown in Figure 3.1, these are:

The advantage of such a framework is its flexibility. Data and analysis may be tailored to the specific needs of policy makers.

Box 3.2 Time and discounting in economic valuation

When economists evaluate benefits and costs which extend over more than one time period, they can use one of two approaches. In the first case, they must make allowance for the fact that individuals view more distant benefits and costs differently than more immediate ones. Generally, the pattern observed is that we prefer costs to be postponed and benefits to be received as soon as possible (for a critique of this approach, see Price (1993)). This situation is referred to as time preference and is mimicked by financial institutions in that they must pay interest on deposits, reflecting the need to return a higher amount to the individual at a later date in order to make use of these funds in the interim. To account for time preference in valuation and cost-benefit studies, economists use a discount rate to weight benefits and costs occurring in different time periods, similar to the payment of interest on bank accounts. Since we would prefer having a sum of money in the present to waiting until a later time period for it, we weight current values more heavily than ones in distant periods. To accomplish this, we use a discount factor which incorporates the discount rate selected. Weighting a series of benefits or costs, and summing these, yields a present value. Once we have calculated the present values of benefits and costs, we normally take the difference between the two, the net present value, as an indicator of a project’s viability in economic terms.

A second approach is to look at the opportunity cost of capital invested in a project, which refers to the profits which could have been obtained by investing this capital in the next best possible opportunity. These foregone profits represent the cost of the capital employed in the project, and the net benefits (i.e., benefits minus costs) of our project must at least equal these foregone profits if it is to be considered viable. Thus, when weighting benefits and costs in different time periods we use the opportunity cost of capital as our discount rate to reflect what the project should be generating in terms of benefits, if it is to be an attractive investment.

The choice of a discount rate is a controversial matter, and will depend in part on whether we are using a time preference or an opportunity cost of capital approach. In addition, some researchers argue that the discount rate should be high, since many projects impose damage on the environment and should be penalised, while others argue that no discount rate should be used at all, to incorporate sustainability considerations and the interests of future generations. The effects of projects on the environment range widely, suggesting that an appropriate choice of discount rate might be expected also to vary with the circumstances. However, this creates difficulties, since it is generally preferable to use a single rate for all projects evaluated to ensure consistency and to allow for comparisons amongst different projects. If this is done (as opposed to a separately determined discount rate for each project), then the overall impact of high or low discount rates on the environment becomes ambiguous: with a high discount rate, for example, environmentally damaging projects are discouraged and the overall level of investment, and therefore the rate of natural resource use, declines, but this comes at the expense of weighting the consumption of the current generation higher than that of future generations (Pearce, Markandya and Barbier, 1989). As a result, there is an emerging consensus that no adjustment be made to the standard economy-wide discount rate when evaluating environmental values, and instead other techniques should be used to adjust for any special conditions associated with environmental benefits and costs (Markandya and Pearce, 1988).

For example, there may be no need to value alternative land uses if the relevant issue is the external impact of a specific activity. Similarly, there may be no need to estimate the total economic value of wetlands under all potential uses if policy makers want to compare the relative costs and benefits of only a limited number of alternative proposals.

Before considering Stages 2 and 3 of the assessment process, it is worth briefly explaining what is involved in each of the above assessment approaches.

The first approach, impact analysis, is most relevant in situations where disturbance of a particular wetland results in specific environmental impacts [note 10]. For example, assume that discharges of oil are regularly polluting an estuarine wetland, affecting both fish production and water quality in the wetlands. The costs of this activity are the losses in wetland values arising from damage to the ecosystem and its resources. These damages would amount to the losses in net production benefits (i.e., the economic benefits of production less the costs) from the impacts of the oil spills on the fishery plus the losses in net environmental benefits in terms of poorer quality water supplies for wetland and neighbouring settlements, as well as for general ecosystem functioning. Thus, by assessing and valuing these losses, we would arrive at an estimate of the net production and environmental benefits of the wetlands lost as a result of the oil spills. The total cost of this impact in terms of damage to the wetland are these foregone net benefits.

Essentially, what the impact analysis is telling us is that oil exploitation is imposing external costs on the wetland system. These off-site costs must be weighed against the net benefits gained from additional oil developments. Thus only by assessing and valuing the external losses from reduced water quality and fish production in the wetlands would we arrive at a true measure of the net benefits of the oil development (see Box 3.5). Even if these net benefits from development exceed the costs of the impacts or oil discharges, calculation of the impacts on the wetlands may be important for determining whether it is worth investing in pollution abatement.

As discussed in Section 2.1, it may also be important from a policy perspective to assess the distributional impacts of wetland modifications, in terms of which communities are affected the worst. Finally, if the offsite costs of wetland disturbance are irreversible, then it may be economically efficient to continue with oil developments in the short term, but this outcome may not be sustainable over the long term [note 11].

Box 3.3 Examples of impact analysis applied to economic valuation

Dixon and Hufschmidt (1986) and Dixon et al. (1988) illustrate the application of impact analysis in determining the cost-effectiveness of various options for disposing of waste water from a geothermal power plant on the island of Leyte in the Philippines. In this case, it was necessary to decide which means of waste water disposal from the plant would protect the environment in the most cost-effective manner. For some of the options, the costs of the environmental impacts in terms of lost marine fishery and rice production were quantified. Other environmental costs, such as energy loss, lost riverine fishery production, human health effects and amenity impacts, were not possible to quantify. For example, the analysis showed that the quantifiable environmental costs of releasing untreated waste disposal into the Bao River or into the Mahiao River were quite high, accounting for 41% and 35% of total measurable costs of these options respectively. Both options may also seriously contaminate the marine ecosystem with unknown and unquantifiable effects. The result was that consideration of the quantifiable and unquantifiable environmental impacts made reinjection of wastewater into the geothermal source the more attractive option.

Impact analysis has also been applied to the assessment of agricultural programmes and policies which may have unintended impacts on wetlands. Several studies, for example, have considered the role of agricultural support prices or public infrastructure investments in causing losses of economic values associated with North American wetlands (van Kooten, 1993; Stavins and Jaffe, 1990). Such policies may be intended to encourage an expansion in cultivated land area but often do not give consideration to the wetland values forsaken. If these values were to be taken into account, the net benefits of the government programme would be much lower than anticipated. Ironically, many governments do provide assistance to farmers to encourage retention of important wetland habitat, while at the same time maintaining incentives to drain wetlands. However, Van Kooten, for example, shows that to offset the impacts of the Canadian government’s agricultural support policies on prairie wetlands, prairie farmers would need to receive an incentive of C$ 55 (US$45) per acre (1988 prices). In fact, the government at that time paid out incentives to retain wetlands of at most C$ 30 (US$ 24) per acre. In the absence of agricultural support payments, an incentive sufficient to encourage conservation of these private wetlands would have been much lower.

A second type of cost-benefit assessment, partial valuation, is the principal method used to evaluate alternative wetland use options. That is, choices involving diversion, allocation or conversion of wetland resources should compare the net benefits generated by each of the wetland uses. For example, assume that there is an upstream irrigation project on a river that is providing water for agriculture. If this project diverts water from a wetland downstream, then any resulting loss in wetland benefits must be included as part of the overall costs of the project. If the foregone wetland benefits are significant, then the failure to assess the loss of wetland benefits will clearly lead to an overestimation of the true net benefits of the development projects (see Box 3.5). This is tantamount to assuming that there is no economic cost of diverting floodwater from the wetlands, which is rarely the case. Moreover, it may not be necessary to measure all affected wetland benefits; for example, one or two impacts may prove to be sufficiently large to render the development project uneconomic. In any case, it is not necessary to measure all wetland benefits but only those benefits which are affected by the development project – which is why this approach is called a ‘partial valuation’.

Box 3.4 Examples of partial analysis applied to wetlands valuation

A few examples may help to illustrate the partial valuation approach. An analysis by Barbier et al. (1993) following this approach was conducted for the Hadejia- Jama’are floodplain in Northern Nigeria, which is being threatened by upstream water developments. The analysis shows that the floodplain agricultural, fishing and fuelwood net benefits are much more substantial than the net benefits of an upstream irrigation project, which is diverting water from the wetlands. For example, the authors estimated the net present value of agricultural, fishing and fuelwood benefits from the wetlands to be N253 to 381 ($US 34 to 51) per hectare (in 1989/90 prices), while the net present value of benefits from diverting streamflow to the irrigation project were only N153 to 233 ($US 20 to 31) per hectare. An even more pronounced divergence was noted when benefits were calculated on the basis of water use (e.g., per thousand cubic metres) rather than land area.

Hanley and Craig (1991) conducted a partial valuation of alternative uses of peat bog in Northern Scotland’s ‘Flow Country’. This large area of blanket peat bog, covering over 400,000 hectares, has many unique plants and the area is an important bird habitat. It has been subjected to conversion through planting of pine and spruce in block plantations. Damage to the bog area results from habitat disturbance, disruption of water and soil regimes, and increased sedimentation and erosion, and there is a net release of carbon to the atmosphere. The authors calculate the net benefits of tree planting and estimate that the net present value of an infinite rotation is negative, at £895 (US$ 1595) per hectare (in 1990 prices), suggesting that it is only as a result of government incentive payments that planting has occurred (N.B. these payments have since been withdrawn). The benefits of retaining the area in its natural state were assessed using a survey questionnaire to solicit individuals’ willingness-to-pay for conserving the area (see Box 3.8). The net present value of conserving the area was estimated at £327 (US$ 580) per hectare, which contrasts with the already negative figure arrived at for converting the bog area to block plantations.

Chapter 4 provides full descriptions of these case studies.

The third assessment approach, total valuation, is most appropriate where a full accounting of the costs and benefits associated with retaining a particular wetland is required.

Box 3.5 Impact, partial and total valuations – a more formal analysis

The assessment approaches described in the main text – impact, partial and total valuation – can also be defined in a more formal, mathematical way, which helps clarify the distinctions. For impact analysis, we can use the example of regular oil discharges polluting a wetland, cited earlier. Losses in net production benefits from the impacts of the oil spills on the wetland’s fishery plus the losses in net environmental benefits (i.e., poorer quality water supplies for wetland and neighbouring settlements, as well as for general ecosystem functioning) can be referred to as NBW. The total costs of the impact on the wetlands, CI, are these foregone net benefits:

CI = NBW

If NBD is the direct net benefits of oil production, from society’s perspective, additional oil exploitation is worthwhile only if:

NBD > CI

For partial valuation, assume as in the main text an upstream irrigation project diverting water from a downstream wetland, resulting in losses in wetland benefits. These losses must be included as part of the overall costs of the project. Given direct benefits (e.g., irrigation water for farming), BD, and direct costs (e.g., costs of constructing the dam, irrigation channels, etc.), CD, then the direct net benefits of the project are:

NBD = BD - CD.

However, by diverting water that would otherwise flow into the downstream wetlands, the development project may result in losses to floodplain agriculture and other primary production activities, less groundwater recharge and other external impacts. Given these reductions in the net production and environmental benefits, NBW, of the wetlands, then the true net benefits of the development project (NBP) are NBD - NBW. The development project can therefore only be acceptable if:

NBP = NBD - NBW > 0

An objective requiring total valuation might be (as in the main text) the need to determine whether or not the wetlands should become a protected area. The total net wetland benefits, NBW, would therefore have to exceed the direct costs, CP, of setting up the protected area, including any costs of relocating or compensating existing users, plus the net benefits foregone, NBA, of alternative uses of the wetlands:

NBW > CP + NBA .

For example, as part of a natural resource accounting exercise, it may be necessary to measure the total economic contribution of a particular wetland to the welfare of society as a whole. In this case, the aim is to value as many of the net production and environmental benefits associated with the wetland as possible [note 12].

Another objective requiring total valuation would be the need to determine whether or not the wetlands should become a protected area with restricted or controlled use. The total net wetland benefits would therefore have to exceed the direct costs, CP, of setting up the protected area (including any costs of relocating or compensating existing users), plus the net benefits foregone of alternative uses of the wetland.

Box 3.6 Examples of total valuation applied to wetlands

Several examples of total valuation studies of wetlands can be cited. Again considering Louisiana’s coastal wetlands, Costanza, Farber and Maxwell (1989) attempted a total valuation which included benefit estimates for commercial fisheries, trapping, recreation and storm protection. Using a variety of techniques, the authors estimate the total value of these key benefits provided by the wetlands at $US 2,429 per acre (using an 8% discount rate). Commercial fishing and trapping account for 19% of the total, recreation for 2% and storm protection services make up the remainder. Chapter 4 provides a full description of this study.

Gren (1994) conducted a total valuation study of the Danube River floodplains to assist with determining the potential benefits from improving the water quality and overall management of the Danube. Although some values are based on benefits transfers (see Box 3.7), credible estimates are made of the key resource products harvested from the floodplains (e.g., wood products, fodder and fish), as well as for recreation and nitrogen retention, which is an important ecological function in such a polluted river system. The total economic value of these major uses of the floodplains is $US 458 per hectare per year (1993 prices). Of this total, their role as a nitrogen sink represents 56% of the total and recreation accounts for 29%. The remaining 15% comes from harvesting of wood products, fodder and fish.

3.2 Stage two: defining the scope and limits of the valuation and information needs

After the appropriate economic assessment approach for the stated problem is identified, the next step is to define the analysis and information needs required to conduct the assessment. The first step is to identify the wetland area under consideration, the time scale of the analysis and the geographic and analytical boundaries of the system. These will obviously differ given the type of problem to be analysed. For example, an impact analysis of the effects on a wetland of changes in water quality and flow would have to include both activities within its ‘analytical’ boundary and a time horizon sufficient to cover the duration of the changes in the water flow regime and the impacts of deteriorating water quality. In contrast, any attempt to measure the total economic contribution of a particular wetland to the welfare of society as a whole would have to have an extremely wide analytical boundary, sufficient to cover all possible social values of the wetlands, as well as a very long time horizon, perhaps sufficiently long to include intergenerational implications.

Once the system and analytical boundaries are defined, further analysis is needed to determine the basic characteristics of the wetland being assessed. In an economic assessment, we are essentially concerned with ‘valuing’ these characteristics. In ecology, a distinction is usually made between the regulatory environmental functions of an ecosystem (e.g., nutrient cycles, microclimatic functions, energy flows, etc.) and its structural components (e.g., biomass, abiotic matter, species of flora and fauna, etc.). This distinction is useful from an economic perspective, as it corresponds to the standard categories of resource stocks or goods (e.g., the structural components) versus environmental flows or services (i.e., the ecological functions). Economics also tends to make a distinction between consumptive uses of resources (e.g., fish, fuelwood, wild foods, etc.) and non-consumptive uses of a natural system’s ‘services’ (e.g., recreation, tourism, educational use, etc.). In addition, ecosystems as a whole often have certain attributes (biological diversity, cultural uniqueness/heritage) that have economic value either because they induce certain economic uses or because they are valued in themselves.

Box 3.7 Benefits transfer: shortcut or misleading technique?

Benefits transfer refers to the practice of using values estimated for an alternative policy context or site as a basis for estimating a value for the policy context or site in question. Benefits transfer studies are often the only recourse where data is poor or funds are not sufficient for a full-scale valuation study. For example, Gren (1994) describes a total valuation study where the benefits of nitrogen abatement at wetlands along the Danube River are estimated using information for wetlands on the island of Gotland in Sweden. Whether this practice is advisable depends on a number of factors, not least of which is the similarity of the sites. Benefits transfer may be questionable or misleading in some cases, so that the familiar argument that some number is better than no number may not hold. A decision about whether to proceed with original data gathering to estimate some wetland value must weigh the costs of collecting this information against the disadvantages of not having such information. In the latter case, a benefits transfer study may well be a viable alternative, but this will hinge on the policy question being addressed and the availability of original benefit estimates as a basis for a benefits transfer.

Krupnick (1993) discusses the situations where a benefits transfer may be appropriate and points out that the valuation of health impacts may be more amenable to benefits transfer than the valuation of other impacts, such as changes in recreation values. Since the impact of environmental change affects individuals indirectly, via their perception of their health status, studies of the value individuals place on avoiding health problems can be used independently of the source of a specific problem, as long as appropriate caution is maintained. A case study of nitrogen abatement using wetlands, described in Chapter 4 (Gren, 1995), takes this approach, making use of estimates of the value individuals place on reduced nitrate concentrations in drinking water, which is independent of how the nitrate is removed. For recreation, an important wetland use value, there is greater difficulty in using benefits transfer, since values tend to be highly reliant upon site and sample population characteristics. Studies also may differ in focus, as in analysing changes in quantity as opposed to quality. Where visual attributes are at stake, there are liable to be even more problems with the use of benefits transfer.

What is lacking at present are well-defined protocols, such as have begun to emerge for valuation techniques like contingent valuation (see Box 3.8). Krupnick hints at some possible guidelines for planners considering the use of benefits transfer. Obviously, the more similar are, not only the sites, but also the characteristics of markets and users, the more appropriate is a benefits transfer. Where demand or value functions are reported in original studies, these should be used along with variable observations for the site or population under study, rather than using simple average unit values from the source study. More important, the need for benefits transfer suggests that more attention should be paid to the design of studies collecting original data to incorporate measures which would make their use in benefits transfer situations easier. Fuller reporting of methodologies and data used in original data studies, including mean values of independent variables and equations used to estimate economic values, would be a step in the right direction. Certainly, any planner contemplating the use of benefits transfer to estimate wetland values should carefully evaluate the original data studies to be used to ensure their appropriateness for the task.

A special issue of Water Resources Research (vol. 28, no 3) also contains a series of papers on benefits transfer.

The next step is to determine the type of value associated with each of the wetland system’s structural components, functions and attributes. Earlier it was helpful to distinguish between direct use values (e.g., the values derived from direct use or interaction with a wetland’s resources and services); indirect use values (the indirect support and protection provided to economic activity and property by the wetland’s natural functions, or regulatory ‘environmental’ services); and non-use values (values that are not derived from current direct or indirect uses of the wetlands). This grouping should be used when translating the characteristics of the wetland into economic terms.

Section 2.2 indicated the major types of economic values associated with wetlands, which correspond to the general wetland resources, functions and attributes listed in Appendix 1. Depending on the wetland system and the management problem, different ecological characteristics and economic values will be considered important. Once the major characteristics and values have been identified, they need to be ranked. The basis for ranking will again vary with the assessment approach. For example, in an impact analysis the criteria for ranking would most likely be based on which of the wetland’s resources, functions and attributes are most affected by the impacts that are being assessed. For a partial valuation, it is important to identify the relative importance of different values and to determine the ‘cost effectiveness’ of acquiring and assessing the data. That is, in comparing alternative wetland uses, one must determine which of the wetland’s resources, functions and attributes are critical for evaluating the alternative options and how easy is it to quantify and value them. For a total valuation, the criteria will be similar, but as the goal is to estimate the total economic contribution of the wetlands, one should at the very least choose to assess those characteristics that contribute most to the total value and if possible attempt to estimate all the major values. In contrast, under a partial valuation, one would value those characteristics that were both important and appropriate to estimate first, and proceed to more difficult values only as necessary. For instance, measuring existence values is difficult and should be attempted only as a last resort where more readily measured values fail to demonstrate that conservation is the preferred option. The Hadejia-Nguru floodplain, for example (see Section 4.1), takes this approach, but is able to demonstrate that conservation is preferred without reverting to measurement of existence value.

Tables 3.1 and 3.2, using examples from Central America, illustrate the importance of determining and ranking the relevant direct and indirect use and non-use values for different wetland systems. The two examples involve a freshwater wetland system in Guatemala and a coastal mangrove system in Nicaragua.

The Petexbatun wetlands are a freshwater system located in Peten State of Northern Guatemala (Table 3.1). As it is a remote system in a dense tropical forest region, the most important direct-use values are derived from the wetlands’ forest resources and the system’s water supply. The most important ecological functions are flood and water flow control of the Petexbatun River, shoreline/bank stabilisation, sediment retention and external ‘nutrient’ support to important riverine fisheries. An essential environmental service provided by the wetlands is their direct use for water transport by local populations. The direct, indirect and non-use values of the biodiversity of the system are not particularly significant, and there is little to suggest that the wetlands have unique cultural or heritage value.

The North Pacific Coast mangrove wetlands are located near the large port of Corinto, Nicaragua (Table 3.2). The mangrove system has similar important direct use values to the Guatemalan freshwater wetlands: exploitation of forest resources, water supply and water transport.

However, the location of the mangrove wetlands near Corinto port and in an area of important agricultural and fishing activity suggests that they provide some key environmental services. In an area highly susceptible to hurricanes and other tropical storms, the storm protection, wind break and water flow/control functions of the mangrove swamps may prove critical. Similarly, the sediment and nutrient retention capability of the mangroves may reduce dredging costs for the port and key waterways. Finally, as a shrimp and fish breeding ground and hatchery, the mangroves provide important external support for the offshore fisheries in the area. There appears to be nothing particularly unique about the biodiversity of the wetland system, but as the site of original settlements and waterways in Nicaragua, the wetlands may have some heritage value.

Identifying system and analytical boundaries, listing characteristics and values and ranking them in terms of importance to the assessment are all important steps in defining the information required for the analysis. If these information needs are correctly appraised, it is easier to determine the resource constraints to obtaining this information, the data collection methods required and the appropriate choice of valuation techniques.

3.3 Stage three: defining data collection methods and valuation techniques required for the economic appraisal

The final stage involves carrying out the actual assessment itself. Priority should obviously be given to assessing those resources, functions and attributes w

Use Values			Non-Use Values
Direct Use Value	Indirect Use Value	Option and Quasi- Option Value	Existence Value
fish	nutrient retention	potential future (direct and indirect) uses	biodiversity
agriculture	flood control	future value of information	culture, heritage
fuelwood	storm protection	.	bequest values
recreation	groundwater recharge	.	.
transport	external ecosystem support	.	.
wildlife harvesting	micro-climatic stabilisation	.	.
peat/energy	shoreline stabilisation, etc.	.	.