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Chapter 7: Monetary accounts for forests

While policy-makers need information about the physical status of forests, policy must also be informed by the economic value of forest resources. Some components of forest accounts, notably, wooded land, standing timber and timber and wood products, often have market prices that are used for valuation. Many other forest products, especially forest services, are not exchanged in markets and do not have market prices for valuation. Valuation techniques for non‑market forest products are not as well developed. There have been many academic case studies and studies related to specific projects, especially for carbon storage, but the methodologies and assumptions required for valuation have not been standardized, and the approaches are not always consistent with SNA.

The Eurostat pilot programme identified three major difficulties faced when incorporating the value of non-market forest products in monetary forest accounts:

§ Availability of data for non-market forest products. The underlying physical data as well as the monetary value for non-market forest products vary greatly across countries and, for some forest services, may not exist.

§ Comparability of monetary estimates. The methods and assumptions used in the valuation studies are not standardized, and many theoretical and practical problems are still being debated. Weaknesses in the physical data, which are often the basis for the value estimates, compound this problem. The use of different methods and assumptions for valuation of different forest services, even within the same country, limits comparability.

§ Comparability with national accounts data. When results from valuation studies are combined with national accounts data, care must be taken to avoid overlapping and double counting with values already included in national accounts. Also, national accounts data are mainly based on market prices, while most non-market valuation techniques include the consumer surplus (Eurostat, 2002b, p. 45).

The first part of this chapter discusses valuation for forest assets. The next two sections discuss flow accounts and the monetary SUT. The final two sections discuss the two other monetary components of forest accounts: accounts for expenditures for forest management and macroeconomic indicators.

7.1 Valuing forest assets

7.1.1    Value of wooded land and standing timber

The asset value of forests is based on the stream of benefits a forest generates over its lifetime. In principle, the asset accounts should include the value of all goods and services provided by forests, but, so far, the accounts have been limited to land and standing timber because of the problems of valuation of non-market forest goods and services.

Land value is included in SNA and is the only non-produced asset that often has a market price. The valuation of wooded land and standing timber is well established in forest economics literature and will be only briefly described here. SEEA-2003 provides further discussion of valuation issues in general and Eurostat 2000 provides a detailed discussion of valuation of wooded land and standing timber. In principle, wooded land and standing timber should be treated as separate assets. However, it is not always easy in practice to separate these two assets. Due to location, regulation or other considerations, the use of wooded land may be restricted to timber (as well as NTFP and forest environmental services); transactions may combine both assets that, taken together, are called a ‘forest estate.’

Wooded land

Ideally, the value of forestland is based on the market value of the bare land that is revealed through sales of land. Where data are not available, SEEA recommends that land value be estimated on the basis of tax values, or other administrative data, or as a share of the market value of forest estates (land and standing timber combined). Tax values, or similar administrative assessments, are the simplest to use but they may be lower than market values and should be checked against market transactions. Typically, the value per hectare is estimated and applied to the entire area of wooded land.

Where land and timber are combined in a forest estate, it is necessary to estimate the share of land in the total value of a forest estate. An economic technique called hedonic pricing may be used (Box 7.2). Valuation of wooded land may be especially difficult in developing countries, where the number of market transactions is likely to be small and administrative data may be weak.

Standing timber

The value of any asset is the discounted present value of the economic benefits it will generate in future years. For forests, the theoretical value of timber based on this concept was first established by Faustmann in 1849 (Faustmann, 1849) and is well established in forest economics literature. Timber asset value is the discounted future stumpage price for mature timber after deducting costs of bringing the timber to maturity. The stumpage price is the price paid to the owner of the forest for standing timber, or in the absence of such markets the stumpage value can be estimated by deducting the costs of logging and transportation from the price received for raw wood (see below). Costs include thinning (net of any income), other forest management costs and rent on forestland.

The Faustmann method is rather complex as it bases forest asset value on the age structure of forests and the time to harvest. To implement timber valuation, SEEA lists three alternative methods for calculating the value of standing timber (mathematical formulas for each method are given in Box 7.1):

Net present value approach implements the Faustmann method described above. It may be implemented using the average stumpage value for all removals or by distinguishing stumpage values for different species.

Stumpage value approach, also known as the net price method, is a highly simplified version of the net present value approach. It multiplies physical stock with the average stumpage price of the timber removed. Where there is a market for standing trees, the stumpage values are directly observable. In the absence of such markets (or where market prices may be distorted), the stumpage value can be estimated. Under highly restrictive assumptions (that the discount rate equals the natural growth rate of the forest), this approach is the same as the net present value approach. This approach may be refined by applying the stumpage value for different species to the remaining stock of each species.

Consumption value approach is a variant of the stumpage value approach where stumpage value is distinguished not only by species but by age or diameter class as well. The distinction between the two is that the stumpage approach uses the structure of fellings for weighting stumpage prices, whereas the consumption approach uses the structure of the stock.

Box 7.1. Value of standing timber

The general expression for the value of an asset, V, in the base year, 0, is simply the sum of the net economic benefits it yields in each year t, over the lifetime, T, of the asset, discounted to present value by the discount rate, r.


where p is the unit rent (stumpage price) calculated as revenue minus the marginal cost of harvesting, and Q is the total harvest in a given period. SEEA identifies three alternative methods for valuation of standing timber:

1. Stumpage value method
The simplest of the three approaches, asset value of standing timber, V, is given as the product of total forest area in hectares, A, the stumpage price per cubic metre of timber, p, and the quantity of timber per hectare (cubic metres), Q:

V = ApQ

2. Consumption value method
This method expands the stumpage value method to account for the difference in value of trees of n different age or diameter classes, k:



3. Net present value method
The total value of standing timber, V, is the sum of v , the value per hectare of forestland of age class , weighted by A , the total area in age-class , where T, is the actual cutting age, p t is the stumpage price, qT, is the timber yield at actual cutting age. The value is discounted at a rate, r, by the time remaining until harvest, T- . (The following presentation abstracts from other important characteristics that affect forest value such as species, region, site quality, etc, for ease of reading.)

for = 1, …, T-1



or,

 

This expression for forest asset valuation may be further refined to reflect timber value, the value of the bare land, p L , and full rotation management costs, Cs.


Additional variations of the net present value method are described in (Eurostat, 2000).

Under the Eurostat pilot programme, countries applied each method with quite different results. Table 7.1 reports the value of standing timber calculated using the three main alternative valuation methods. Although conceptually preferred, Eurostat found the present value approach to standing timber was complicated and required a great deal of data, which not all countries had. Consequently, the stumpage value approach was recommended.

Experience in other countries is mixed, some using the net present value approach and others the stumpage value approach, depending on the availability of data. There is no single standardized approach recommended by SEEA at this time. International comparability of timber asset values will be limited by the adoption of different valuation methods depending on a country's data availability.

Table 7.1: Value of standing timber using different valuation techniques
(million ECUs)

  Valuation method

Germany 1995

Austria

1995

France

1991

France 1996

 Stumpage

19.1

19.8

32.1

35.3

 Consumption

31.1

22.0

20.8-26.8*

Na

 Net present value

-53.0

26.5-28.1*

39.5

Na

* Different assumptions resulted in a range of values

Source: Adapted from Eurostat 2002a

An example of complete monetary asset accounts for wooded land and for standing timber is shown in Tables 7.2 and 7.3. The entries correspond to physical accounts but contain an additional entry for revaluation, which records the change in asset value due to changes in prices between the beginning and end of the period.

Table 7.2:        Forest asset accounts:  value of wooded land, Finland 1998 (million ECU)

 

 

Available for wood supply

Not available for wood supply

Total

 Opening area

          5180

             524

      5704

 Change due to economic activity

 

 

 

 

Afforestation

                 2

 

             2

 

Deforestation

               -2

 

            -2

 Other changes

 

 

 

 

Natural colonization

 

 

 

 

Natural regression

 

 

 

 

Other

 

 

 

 Changes in classification

               -1

                 1

             0

 Revaluation

              36

                 4

           40

 Closing area

          5215

             529

      5744

Source: Adapted from Eurostat 2002a, Table 10, p. 24

 

Box 7.2.           Estimating land value with the hedonic pricing technique

Hedonic pricing is based on the idea that the purchase of a forest estate represents the purchase of a bundle of attributes that cannot be sold separately: land itself, volume of standing timber of particular species and age composition, and other forest goods and services such as hunting rights and recreational services. Statistical regression analysis of forest estate sales on the attributes of the forest reveals the amount that bare land, timber volume and characteristics and NTFP contribute to the total value of land. The same method may be applied to wooded land not available for wood supply. It will have a positive value that includes the value of land plus the value of NTFP. The limitation to this technique is the small number of annual market transactions. In developing countries, where a large share of wooded land may be owned by the state, or as common property managed by local communities, there may be no sales of land.

 

 Table 7.3:        Forest asset accounts:  value of standing timber, Finland (million Finnish marks)

 

 

Conifers

Broad-leaved

Total

 Opening stock

         242,187

         32,112

     274,299

 Natural growth

           36,343

           6,811

       43,154

 Fellings

          -28,960

          -4,342

      -33,302

 

Harvested timber

          -28,182

          -3,785

      -31,967

 

  Saw logs

          -19,708

          -1,342

      -21,050

 

  Pulpwood

            -8,130

          -1,831

        -9,961

 

  Fuelwood

               -344

             -612

            -956

 

Timber left in forest

               -778

             -557

        -1,335

 Other removals

                     0

                   0

                  0

 Changes in classification

            -1,015

             -141

        -1,156

 Revaluation

          -24,351

             -518

      -24,869

 Closing stock

         224,204

         33,922

     258,126

Note: Year for accounts not given in source

Source: Adapted from UN et al., 2003, Table 8.15, p. 352

Measuring stumpage value

In some instances the resource rent from timber, or stumpage value, is known from the value paid for standing timber. In other cases it must be calculated. For individual companies, stumpage value equals raw wood prices minus the logging, transportation and stacking costs. Total national resource rent from logging may be calculated from national accounts, as in the example in Table 7.4. In this example, forest operations are conducted in part by owner operators. Gross value-added for the industry is 849, of which 200 is paid for employment costs and 649 remains as mixed income. Mixed income includes the labour of owner-operators (100) plus fixed capital costs (consumption of fixed capital (174) and a return to capital assets (133)) and stumpage value (242). Stumpage value is calculated as a residual after estimating all other components of mixed income.

Table 7.4:        Example of calculation of stumpage value for timber (million currency units)

 Gross value-added

 (assuming no taxes or subsidies on production)

849

 

 

 

 

 

 

Compensation of employees

200

 

 

Mixed income/gross operation surplus

649

 

 

of which:

 

 

 

   Compe nsation for labour of owner-operators

 

100

 

   Consumption of fixed capital

 

174

 

   Return to fixed capital*

 

133

 

   Stumpage value (resource rent)

 

242

* Calculated as the product of the stock of fixed capital and the rate of return.

Source: Adapted from UN et al., 2003, Table 7.16, p. 308)

7.1.2    Value of deforestation and forest degradation

In the early years of environmental accounting, measuring the cost of deforestation—depletion of forest assets—was a primary motivation for constructing accounts for forests as well as for other natural resources. By the 1990s, a number of alternative approaches to valuing depletion emerged, which result in very different estimates. One approach applies the stumpage value to the excess of fellings over natural growth. The other approach measures the difference in asset value from the beginning to the end of the period. The latter approach takes into account both excess of fellings over natural growth as well as changes in stumpage value during the period that affects asset value. All methods have included only timber value of forests. The mathematical formulation for these methods is provided in Box 7.3.

There has been no agreement about which method to use. The European pilot programme does not recommend monetary estimates of the cost of deforestation or defoliation. SEEA discusses valuing deforestation but does not recommend a particular method.

Forest degradation has been more difficult to value. The health of a forest determines its ability to provide all goods and services. In principle, the monetary value of a change in forest health would be the monetary value of the resulting change in forest goods and services provided. It is very difficult to relate forest health direct to forest ecosystem productivity (with the possible exception of timber production) and there has been no attempt so far to value forest health accounts.

SEEA-2003 provides two different conceptual approaches to valuing degradation: the maintenance cost approach and the damage cost approach. Maintenance cost is based on the cost of actions that would have to be taken to prevent or remedy degradation, for example the cost of changing logging practices so that they are less environmentally damaging or the cost of removing silt from a dam. Damage cost is based on the value of the damages or loss of function due to degradation. Damage valuation includes, for example, the reduced income from tourism due to forest damage, the loss of fish production and harvest due to damage of river spawning grounds or the loss of hydroelectric capacity due to siltation.

 

Box 7.3.  Monetary value of forest asset depletion

The early approach to depletion valuation applied the stumpage value method to measure net loss (gain) of standing timber in a given year (Bartelmus et al., 1992; Repetto 1987, 1989; van Tongeren et al., 1992). This approach was popular because it was quite easy to calculate. However, it was later recognized that this concept, which corresponds to ecological concepts of sustainability, was not consistent with the economic concept of depreciation used in SNA. The value of an asset is affected not only by physical volume, but also by holding gains and losses. (For further discussion, see Davis and Moore 2000, Vincent 1999.) The revised SEEA-2003 proposes a concept of depletion cost more consistent with economic depreciation: the change in asset value from one period to the next. However, several alternative ways to measure this cost have been proposed and no consensus has yet been reached. 

1. Depletion using stumpage value method for net loss (gain) of standing timber

Depletion, D, is calculated as the volume of harvest above net growth times, Q - G, times the stumpage fee, p:

                 

2. Economic depreciation approach

                                               

where Vt , Vt+1 are defined using net present value method to calculate V, an approach developed by Vincent (1999) specifically for forests.  The change in asset value takes into account both physical changes in the asset as well as value changes, capital gains or losses, which is consistent with the SNA method of calculating depreciation of manufactured assets.

 
 

In the absence of efficient markets, these measures are likely to be quite different. The damage cost is the theoretically correct approach for measuring changes in economic wellbeing, but both measures provide useful information for environmental management. Calculating the cost of degradation relies on good data linking the physical status of a forest and the services it provides; these data are often difficult to obtain and sometimes highly speculative. In calculating the costs of forest degradation, practitioners must take care not to double count. Forest degradation that affects production is already included in national accounts in terms of higher production costs or lower output for hydroelectricity, agriculture, fisheries, etc. The forest degradation accounts are useful for making explicit the reason for higher costs, relating these costs to forestry.

7.2 Valuation of forest goods and services

Ideally, forest accounts would identify three components of the value of forest goods and services: the output or production value, the value-added part of output value and the in situ value of a resource. The value-added generated by forest goods and services is a portion of the extraction costs, measured as output minus all intermediate costs of production. This value is the contribution to GDP. In some instances, such as the collection of firewood, the primary inputs are labour, cutting implements and sometimes transportation if the firewood is not carried by hand. In many developing countries the labour input constitutes the largest input and other inputs are ignored. Where there is extensive commercialization of forest products, other costs, such as transportation, may become important.

The in situ value is the resource rent generated by forest products, the value of the product minus its extraction costs, which is comparable to the stumpage value of timber. It is, in principle, the amount that someone would be willing to pay to rent the forest in order to have access to the product. If non-market forest products were to be included in forest asset accounts, it is the in situ value that would be used.

As a general observation, forest accounts have most often measured the physical quantities and output value of NTFP, but have not always calculated the value-added component of these products and have rarely considered the rent or in situ value. For the harvest of NTFP, household labour is often the main input and the distinction between total value-added and in situ value is highly sensitive to the assumptions made about the opportunity cost of labour. Chomitz and Kumari (1996, p. 22) report studies where the in situ value is close to zero.

Forest goods and services may be divided into three categories based on the approach to valuation. Some forest goods and services are exchanged in markets and can be readily valued at their market price. The second group consists of non-market forest products with close substitutes that have a market price. These ‘near-market’ products can be valued at the price of the substitute products. Finally, there are some non-market forest services that have no market counterpart. Environmental economists have developed a number of techniques to estimate the value of these forest services.

Table 7.5 shows how each product in the forest accounts is usually valued. There are several alternative valuation techniques that may be used for non-market goods and services. Valuation techniques are described below.

Table 7.5:        Valuation techniques for forest goods and services

 Forest product

 Valuation technique

 Land

 Market prices

 Timber

 

 

Commercial timber

 Market prices

 

Non-market timber

 Local market prices of same product

 Price of close substitute product

 Production cost

 Non-timber forest goods

 Local market prices of same product

 Price of close substitute product

 Production cost

 Forest services

 

 

Livestock grazing

 Price of close substitute product

 Production cost

 

Recreation and tourism

 Travel cost

 Hedonic price of land

 Contingent valuation method, conjoint analysis

 Forest environmental protection

 services

 

 

Carbon storage

 Carbon tax

 Carbon emission permit trading price

 Global damage from climate change averted

 

Biodiversity and habitat preservation

 Contingent valuation method, conjoint analysis

 

Protective services for water, soil, etc.

 Damage cost (e.g. reduced productivity in
 non‑forestry sectors)

 Damage prevention costs

 Contingent valuation method, conjoint analysis


Valuation of market and near-market forest products

SNA provides complete monetary accounts for the production of commercial timber and other forest products that are exchanged in formal markets; these monetary values are included in forest accounts. SNA also includes some near-market goods and services, that is, products that are identical or very similar to marketed products but which are produced for own-use or exchanged in informal markets. Values for near-market products are based on the market price of the closest substitute product, or various techniques to estimate the cost of production. For example, virtually all countries include in their national accounts food grown for own consumption as well as the value of owner-occupied housing, near-market products that are valued at the price of their market equivalents. Government administration is a non-market service with no identifiable product sold in markets, so it is valued in national accounts at its cost of production.

Many forest goods and services are not exchanged in markets. In principle, they should be included in SNA but are often poorly measured or completely omitted, especially in developing countries with limited resources for data collection. In developing countries the volume of these goods and services may be quite large. Even when the volume is not large, they may be critical for the livelihoods of many communities so it is important to include them.

Valuation of many non-market forest goods and services utilize the SNA near-market approach where possible; there are three major variations:

Price of identical or very similar product. Generally, the preferred method is to apply the price of the same, or very similar, product that is sold in a market. Production of forest goods may be primarily for a household’s own use, but often there is a surplus that is sold in local markets. Local market prices for these goods may be used to value non-market production taking care to account for regional variations in prices.

Price of replacement product. A variation of this approach is to value forest products at the cost of replacing them with close substitutes. For example, grazing of livestock may be valued at the market cost of purchasing an equivalent amount of fodder or renting grazing land.

Production cost approach. An alternative method is applied when there are no local market prices or close substitutes: estimating the production cost of a product. In the case of many NFTP, the most significant production cost is labour. Products may be valued at the opportunity cost of the time it takes to gather them. An average local wage is used for this calculation, which is adjusted for factors affecting the economic value of the alternative use of a person’s time. Where significant, additional, non-labour inputs should also be included in estimating the production cost.

There is considerable controversy over the volumes extracted and the value of non-timber goods and services. Some have argued (e.g. Batagoda et al., 2000; Pearce et al., 1999) that the global value of non-timber goods and services has been overestimated and is small relative to timber value, although these products may be very important to some local communities. Information about the price of wood or NTFP in informal markets may be collected in the kind of surveys described in Chapter 6 to collect information about physical volumes.

In scaling up to the regional or national level from surveys, one must be very careful. The use and value of non-market forest products by local communities depends on many factors which can vary enormously even within a region, such as the availability of forest products, alternatives available to local communities, opportunities for selling products in local markets and local demand. In applying benefits transfer, the values should be adjusted for regional variations, but there may not be enough information to determine what the adjustment factors should be. Consequently, it is not uncommon to apply the same values to all areas.

 

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