Valuation Methods for Environmental Benefits in Forestry and Watershed Investment Projects

The understatement or omission of the environmental costs and benefits associated with forest management options results in project evaluations and policy prescriptions that are less than socially optimal. The aim of this paper is to examine the full range of costs and benefits associated with forests, distinguishing between how these should, and actually are, included in economic analyses. The paper first describes the economic analysis undertaken in the project evaluation procedure of the World Bank. The second section deals with all costs and benefits that typically occur in forestry projects. Costs and benefits are classified as on-site private, on-site public or global according to their nature and area of impact and according to the Total Economic Value approach. The third section illustrates valuation techniques and how these are employed to estimate all forest values. The purpose of the fourth section is to examine how analysis is implemented in project evaluation, focussing on five case studies undertaken by the FAO Investment Centre. The analysis reveals that the main determinants of the economic viability of forestry projects are the on-site private benefits, while a major weakness of project evaluations is the difficulty in including and evaluating on-site public benefits, mainly associated with externalities. Global environmental benefits associated with carbon sequestration proved to be significant for the economic viability of forestry projects.