The Economic Value of Forest Ecosystems

Forest ecosystems are being degraded and lost because of rapid population change and economic incentives that make forest conversion appear more profitable than forest conservation. All ecological functions of forests are also economic functions. Many important forest functions have no markets, and hence, no apparent economic value, justifying the use of forest land for other purposes. Imputing economic values to nonmarketed benefits has the potential to change radically the way we look at all forests and to make the pendulum swing back from a presumption in favor of forest conversion to more conservation and sustainable use. This paper surveys what we know about forest economic values and draws policy conclusions from the now substantial literature that values nonmarket benefits of forests. Estimating economic values is not enough. The subsequent stage of policy is to design markets that capture the values—‘market creation’—ideally for the benefit of the many vulnerable communities that rely on the forests for their well-being. These conclusions support the wider argument for using effective economic instruments to promote conservation of the remaining forests. Forest loss involves: risks to human health; accelerated climate change; increased watershed disruption, adding to eutrophication in inland and coastal waters; loss of water quality; and loss of biodiversity. Address correspondence to: David W. Pearce, Professor of Environmental Economics, CSERGE-Economics, University College London, Gower St, London, WC1E 6BT, UK; E-mail [email protected] INTRODUCTION: THE ISSUE Forest ecosystems are under threat. Rates of net deforestation (deforestation minus afforestation) are disputed. The Food and Agriculture Organization (FAO 2001) estimates annual global net rates of deforestation of around 9 million hectares in the 1990s, or 0.23% of total forest area. The World Resources Institute (Matthews 2001) disputes that figure, noting that FAO data include biodiversity-poor plantations as afforestation, offsetting natural forest loss. Net of plantation growth, annual losses are closer to 16 million hectares per annum, or 0.4% per annum of forest cover, nearly double the FAO figure. Whatever the right figure, forest loss is a long-term process that reflect the growth of land occupation by humankind and the systematic conversion of forest land to agriculture (Richards 1990). Nonetheless, substantial opinion regards this process as one that now imposes risks to ecological resilience and human well-being. If these risks are real, it is vital to understand the forces at work that generate deforestation. Without an understanding of true causes, effective policy cannot be designed. The reality is that the causal factors are complex and varied. They include population change and the consequent demand for land for food production. But environmental economists have long drawn attention to two other factors that, together, probably account for the greater part of forest loss. Both factors are embedded in a single notion: economic incentives. In the first place, many governments provide financial incentives to convert forest land. Many forms of subsidy, explicit and hidden, encourage inefficient logging and agricultural colonization. In turn, while a few of the subsidies are designed to help vulnerable groups in society, most favor middle and rich classes as forms of ‘rent’ that can then be captured by rent seekers—individuals concerned with maximizing their share of financial revenues in return for political and other favors. Thus, the