Non-Market Valuation- Accounting for Nature and Wellbeing
By Ananya Iyengar (AI) and Gulhaider Zaidi (GZ)
The Economics Society of St. Stephen’s College, Delhi, had the privilege of hosting Dr. Saudamini Das (SD). Dr. Das is NABARD Chair Professor at the Institute of Economic Growth, Delhi and is a Fellow of South Asian Network for Development and Environmental Economics (SANDEE), Kathmandu and worked as Mälar scholar at the Beijer Institute of Ecological Economics, Royal Swedish Academy of Sciences, Stockholm, during 2011-12. Her research areas are climate change adaptation, assessment of loss and damage to livelihood due to climate change, valuation of ecosystem services, coastal vulnerability analysis, and evaluation of public policy.
Dr. Das spoke about the methods and utility of non-market evaluation and its relevance in economics today. She presented her research on the value tourists attached to their experience on a trip to the region surrounding the Kailash Mansarovar and on the effect of cyclones in areas protected by mangroves in coastal Orissa, with special emphasis on the Orissa Super-cyclone, 1999.
We also had the great privilege of interviewing ma’am and are delighted to share the transcript here with you.
AI: This question is regarding Pigouvian taxation. India, for instance, has a 400 rupees per tonne carbon cess which has been considered to be very high by some, considering that India produces so much coal. Can methods of non-market valuation play a major role in designing such tax policies to correctly give a value to the externalities arising from industrial activity?
SD: Yes, but here, coal is already a marketable commodity and has a market existing over here. So here, for coal, non-market valuation doesn’t play a role unless there is some externality that cannot be valued in terms of market prices. For example, effluents drained into rivers, they can be measured by non-market valuation. But even there, you can also use market instruments. People are already using replacement cost or damage cost measures, so you can scientifically measure that. There is some scope of using non-market valuation, but it is more applicable for ecosystem services, for valuing nature. However, for externalities for water pollution and air pollution, I think market-based instruments are still preferable.
GZ: Dr Douglas McCauley, professor of Marine Biology, Ecology and Evolution at the University of California states that “Nature has intrinsic value that makes it priceless and this is the reason enough to protect it.” He doesn’t agree with the concept of non-market valuation and feels it is unethical to attribute any such economic value to nature, as its intrinsic quality should be the reason enough to conserve it.
Do economists and ecologists often disagree about non-market valuation of resources?
SD: You know, I think this is also a very strong and well-circulated statement that you should not be using valuation methods for everything in nature. But the fact that nature is valuable and everybody knew about it but there is still so much of degradation happening, so valuation is only one way to sensitise people. But, at the same time, we don’t encourage valuation for everything all the time. You use valuation only when you don’t have other instruments available. Only in the rarest of the rare cases, where there is no other way out, we go for valuation. And you should do valuation very carefully, with all the ethical parameters, so that you don’t come up with a very unreasonable number… And this is done only to sensitise people because some people, in the government, understand numbers better than just telling them to be ethical and good to the environment. Everybody is “good” to nature yet it is being hampered and harmed in so many ways. So, though I agree that nature has a value, but that hasn’t been enough to stop degradation of the environment. You may have to exploit the environment because nature gives you resources. But even that should be limited and sustainable exploitation… degradation must be stopped. And that is where I think valuation comes into play.
AI: When Industries borrow, banks take into consideration their creditworthiness and not the damage that they create to the environment. Keeping in mind the responsibilities of companies and industries towards the environment, do you see non-market valuation playing a major role in determining lending decisions by banks?
SD: Definitely. I think banks should also be responsible now. You see, these big banks like IDB, whenever they give a loan, they also try to measure the carbon footprint of the loan. How much damage and land use changes these loans are causing? They try to make the loans as carbon neutral as possible. So, for Indian banks too, those norms must be implemented now. They should see to it that they are giving money to somebody who is not unnecessarily polluting the environment, or they are not doing something that is unsustainable. They definitely should be accountable for the carbon footprint of the investment loans. So, if someone is cutting a forest somewhere, they should regenerate the forest somewhere else so that the amount of carbon they are generating is also mitigated. This unfortunately has not happened in India yet. But with non-market valuation, if they are able to value all the externalities that have been created – how much of the forest has been exploited, for example – that will be a better way to pressurise the banks. As nature has been harmed, banks should try to make loans carbon neutral.
GZ: We know, there are various types of ecosystems, like grassland ecosystems, forest ecosystems, desert ecosystems etc. How does the non-market analysis of the elements of an ecosystem change as we move from one ecosystem to another? How does human infringement in these ecosystems present as a challenge, in terms of increased externalities and other anthropocentric activities?
SD: When we switch from one ecosystem to another, it becomes a herculean task to establish a link between the two, unless they are already naturally linked; for instance, grasslands and forests share a lot of common features and hence, it may seem not so unreasonable to study them together. But, there are others, like desert ecosystems and coastal or mangrove ecosystems which have a lot of variations in many aspects.
So, I believe, instead of studying ecosystems individually and then combining our analysis, we should have a ‘landscape’ approach to valuation. According to this approach, we don’t just value one ecosystem but we value the entire landscape, because all these systems work as one unit. The recent Kerala floods were responsible for not only degrading the forests but also for paving way for landslides, which further worsened the conditions of the forests. Agriculture was impacted too. In fact, the maximum loss to agriculture was due to the degraded surrounding landscape. Had the surrounding regions remained intact, then the effect on agriculture would have been much lesser.
So, you see how things are interconnected? In cases when ecosystems are integrated, as they mostly are, we should go for a landscape approach to valuation. This involves ‘bundling’. From each ecosystem, we get a bundle of ecosystem services. Rather than valuing one service, we should value the bundle of entire ecosystem services, which will be possible only when we study these interlinkages among biotic and abiotic factors as a whole and not leave our analysis just on the micro or individual ground.
AI: Do you think we should introduce non-market valuation of nature and its services as a separate subject at the undergraduate level?
SD: Yes. I feel that the study of non-market valuation is integral to the study of economics. No matter how much economists deal in finance, solve macroeconomic problems, frame policies, environmental economics underpins the foundations of all these fields, because at the end of the day, the policies should be such that they do not challenge the environment. Introducing ‘environmental valuation’ as a core course under environment economics is not a bad idea. Non-market valuation is not taught much, neither at the undergraduate level nor at the post graduate level. Presently, it is an independent field of study and people have developed methods of study separately. So, nowhere is it a part of the system. But we must understand that these methods are scientifically executed. Various Nobel laureates have done a lot of research in this field.
GZ: What are some books or other references that might give us a bright insight into the making and use of non-market valuation?
SD: There is this book by Champ, ‘A Primer on Non-market Valuation’, which tells you how to approach non-market valuation. It describes steps and the research methodology very well. Another book from Cambridge University Press Publication, ‘Environmental Valuation in South Asia’ provides case-studies on South Asia in general and the Indian sub-continent in particular. A. K. Enamul Haque from Bangladesh, M. N. Murty and Priya Shyamsundar from Institute of Economic Growth are the authors. For contingent valuation, ‘Contemporary Guidance for Stated Preferences Studies’ by Champ will be a good read.