Full-Spectrum Forest Valuation

A holistic model for quantifying the monetary value of a forest

Introduction

The marriage between the carbon market and the forest conservation movement is faltering. It’s time to re-invent their relationship.

The recent firestorm regarding REDD+ and Verra are a case in point. Refer to The Guardian’s exposé and Verra’s rebuttal for more context. Mongabay has also thoughtfully weighed in.

To many of us working in the field of forest conservation, the sharp criticisms of REDD+ do not come as a surprise. We consider this crisis in confidence as a call-to-action. It’s an opportunity to create the 2.0 approach to ecosystem valuation.

To this end, I propose two alternatives.

• In a companion article, I propose replacing REDD+ with a carbon accounting system called the Forest Carbon Ledger (FCL). Check out Replacing REDD+ with the Forest Carbon Ledger: Forest conservation needs a new methodology.
• In this present article, I outline a broader, more holistic framework for quantifying the monetary value of forests that goes beyond merely measuring carbon. It’s called Full-Spectrum Forest Valuation (FSFV).

To put the FSFV framework to the test, we have a case study: the Capuchin Corridor project in the Pacific Forest of Ecuador. And as a new financing alternative, we propose the creation of the International Biosphere Fund (IBF).

Brief Summary

Reducing a forest’s value to a single metric — like carbon — is an over-simplification and under-estimation of the overall monetary value of a forest. Full-Spectrum Forest Valuation is a form of natural capital accounting that measures the value of a forest by analyzing five value pools:

1. Water
2. Carbon
3. Economic
4. Biodiversity
5. Health & Well-Being

Once the values from each of the five value pools have been quantified and aggregated, the next step is to calculate the opportunity cost of foregoing the unsustainable exploitation of the forest. This can be calculated by summing up the potential value of things like timber, fuel wood, poaching, and minerals that could be cashed in if no effort is made to conserve and/or regenerate the ecosystem.

Lastly, the implementation cost of maintaining and sustainably managing the forest is calculated.

To calculate the net FSFV value, subtract the opportunity costs and implementation costs from the aggregate value measured from the five value pools. The formula is:

Water value + Carbon value + Sustainable economic production value + Biodiversity value + Health & well-being value — Opportunity cost of unsustainable exploitation — investment cost of conserving/restoring it = Net Full-Spectrum Forest Valuation.

Contents

• Introduction
• Brief Summary
• The Current Limitations of Carbon Accounting
• More Than Just Carbon
• Natural Capital Accounting and SEEA
• Calling on Interdisciplinary Collaboration
• The Five Value Pools
• Water
• Economic
• Biodiversity
• Health & Well-Being
• Opportunity Cost
• Investment Cost
• A Note to Comrades
• Quantifying Value vs Commoditizing Forests
• What To Do with the Valuation?
• Stewardship via Capitalism?
• Links to Interconnected Articles

The Current Limitations of Carbon Accounting

REDD+ is an accounting system used by Verra and other carbon offset certifiers to measure the carbon value of existing forests. The name (REDD) is an acronym for “Reducing Emissions from Deforestation and Forest Degradation.”

As a method of quantifying the value of forests, REDD+ is an imperfect system that suffers from perverse incentives and subjective estimations. It’s as if conservationists, economists, and bureaucrats had a three-way tryst that somehow produced a progeny, with lawyers serving as the midwife.

Nevertheless, both Verra and REDD+ were born from good intentions and are trying to solve a critical problem that has global proportions: humanity’s depletion of a biome that is responsible for sustaining life on earth as we know it. So rather than piling on the criticism of Verra, let’s think about how we can improve upon the existing system and create something that works better.

Namely, a more holistic forest valuation model with a wider range of quantifiable metrics.

More Than Just Carbon

Measuring a forest’s value solely on any one factor (for instance, carbon sequestration or timber value) is inherently flawed. It’s like measuring the value of a hamburger solely on the merits of its bun.

Forests offer a slate of ecosystem services that is so broad and complex that mere humans (even with the help of AI) cannot hope to understand it, let alone measure it, in its entirety. That’s why reducing a forest’s value to a single metric — like carbon — is so tempting. It takes an impossibly complex process and reduces it to a simple equation.

But even if we can’t accurately account for all ecosystem services provided by a forest, we can certainly account for more than merely one single metric. In other words, let’s measure the hamburger by the value of its bun, meat, toppings, and condiments. This is something we’re currently capable of doing with some degree of accuracy, even if many of the finer workings within those macro categories are still partially beyond our knowledge.

Natural Capital Accounting and SEEA

The framework proposed in this article, which is broadly referred to as Natural Capital Accounting, is not the only one of its kind. Worth mentioning is a somewhat byzantine framework, devised by the U.N, called the System of Environmental Economic Accounting (SEEA).

The SEEA is a system for quantifying the total value of ecosystem services provided by a given area, with the aim of coming up with a standardized accounting method that can be applied to any ecosystem at any scale.

A key feature of SEEA is that it “follows a similar accounting structure to the System of National Accounts (SNA). The SEEA uses concepts, definitions and classifications consistent with the SNA in order to facilitate the integration of environmental and economic statistics.” (United Nations)

It’s a good idea and a bold undertaking. The problem is that it hasn’t proven to be very useful. It gets bogged down under its own comprehensive weight. If valuing a forest based only on carbon is too simplistic, SEEA runs the risk of overcomplexity, in which case it becomes a bureaucratic tool that nobody applies in practice.

The approach proposed in this article aims for the “goldilocks” range between those two extremes: a more realistic valuation of forests that is also workable for communities and policymakers.

Calling on Interdisciplinary Collaboration

Quantifying the value of a forest is a vast interdisciplinary undertaking. This article proposes a framework and offers a few simple formulas and rough numbers from which to start. We call upon experts from different fields to help us refine the formulas and tighten the numbers.

Specifically, we invite help from people with expertise in the following fields:

• Biomass inventories & remote sensing technology
• Data analytics powered by machine learning algorithms
• Hydrologists
• Agronomists & economists
• Biologists & ecologists
• Systems engineers
• Accountants

Even with the help of all the above experts — and augmented by artificial intelligence — a holistic forest valuation won’t be perfect. But it will be significantly better than REDD+ and other attempts to value forests. It will allow us to paint the whole picture of a forest’s value, albeit with relatively broad brushstrokes.

Satellite imagery of the forest fringe of the Capuchin Corridor in the Pacific Forest of Ecuador

The Five Value Pools

We propose using five value pools to estimate the value of a forest. The values for each pool are estimated and then aggregated — forming a “gross value”. The opportunity cost of heavily exploiting the forest and the investment cost of keeping the forest alive are both subtracted from the gross value, thus generating a “net value” of the forest.

(Holistic) Gross Value — Opportunity Cost — Investment Cost = Net Value of the Forest

The five value pools are:

1. Water
2. Carbon
3. Economic
4. Biodiversity
5. Health & Well-Being

A brief explanation of each value pool and cost category is described below, along with rough formulas.

For an on-going case study of this framework in the Pacific Forest of Ecuador, refer to the article “Quantifying the Value of the Capuchin Corridor: A Call for Interdisciplinary Collaboration in the Wake of the Verra Scandal.”

Water

Forests create, recycle, manage, filter, and store water in several different ways — many of which can be quantified. This framework focuses on the most straightforward calculations of water value.

Consumption Formula:

• The simplest way to measure water value is by calculating the total amount of water consumed (by households, businesses, and public entities, excluding agricultural uses) that is produced by rivers, streams, and wells that are born within the project area or significantly pass through it.
• To convert this number into a monetary value, multiply the number of liters of water consumed by the per-liter cost of water charged by the nearest municipality. If there is no centralized municipal water system in the area (as is the case in much of the Capuchin Corridor), the wider region’s average municipal water costs can be used as a proxy.
• If data for total water consumption is unknown, an alternative is to calculate the number of people who depend (entirely or partially) on water that is produced by rivers, streams, and wells that are born within the project area or significantly pass through it. This number — which should be readily available from demographic data — can then be multiplied by the average per-person municipal water cost in the region.

Notes & Assumptions:

• Water used for agriculture is excluded here because it is accounted for in the “Production” section.
• In the case of watercourses that are not born inside the project area but pass through it, or that are born within the project area but then continue beyond the borders of the project area before consumption, values will be discounted according to how much of that water is attributed to the project area.
• If the per-person calculation is used, partial dependence on water (versus entire dependence) is discounted according to the percentage used from the project area.

Additional Formulas:

There are a few other water-related formulas that are not as straightforward as consumption, but they are important and can be quantified in economic terms. Below is one additional example:

• Estimated cost savings from flood damage prevented by forests by virtue of their services of erosion control and water storage.

Carbon

Carbon accounting is currently the most common method of forest valuation. In this framework, one difference is that carbon is not the only method of forest valuation. Rather, it is one of several value pools.

The second difference is the way in which carbon is calculated.

Current Approaches: REDD+ and ARR

The objective of nature-based carbon projects can take two different angles: 1) reduce CO2 emissions before they happen and 2) remove atmospheric CO2 that has already been emitted and store it in some solid form, such as wood.

Forests provide both of the above services, albeit in different ways. Objective #1 is best achieved by preserving intact forests — i.e., avoiding deforestation. For Objective #2, we need to re-grow forests on land that currently lacks forest.

As it currently stands, REDD+ accounting is used for the former, and ARR is used for the latter. Going forward, one option is to continue using these same two approaches, possibly with some important adjustments. A second option is an entirely new approach to carbon accounting.

New Alternative: Forest Carbon Ledger

The Forest Carbon Ledger (FCL) is an alternative to REDD+ and ARR. It calls for performance-driven PES payments based on the total amount of CO2 stored in the forest over the course of one year, paid ex-post.

Once the total carbon stock of the entire forest is established, it is reassessed on an annual basis using satellite imagery analyzed by machine learning algorithms that detect changes in forest cover. This data is fed into a simple ledger, from which payments are calculated.

Annual FCL payments are only made when the annual carbon outcome is positive. This is different from REDD+, which issues payments to projects even when deforestation occurs.

The FCL approach also eliminates the need for counterfactuals and subjective projections. Permanence and leakage are handled differently, and additionality is no longer taken into account. Smart contracts stored on a blockchain could be used to coordinate all transactions.

Both conceptually and operationally, this new approach is cleaner than REDD+. It’s easier to calculate, monitor, and verify. Likewise, it’s harder to cheat and manipulate.

For a deeper dive into this concept, check out Flipping REDD+ on Its Head: The Forest Carbon Ledger Is a New Valuation Method.

Economic

The sustainable economic value of a forest is most easily calculated in terms of agricultural production and tourism revenue, which are detailed below. If and when other economic metrics can be applied, they should be.

Agriculture

The total agricultural output of the project area (capped at a level deemed sustainable*) is calculated in terms of net revenue. The agricultural calculation considers two main categories of value.

• The value of direct agricultural output that is sustainably produced in the project area.
• The value of indirect agricultural output outside of the project area that benefits from water, micro-climate, and/or biodiversity (seed dispersal and pollination) produced inside of the project area.

*In this case, “sustainable” is defined as: at a level that can be sustained over a period of multiple generations with zero or minimal inputs from outside of the project area. If any inputs are imported into the project area, the cost of those inputs and their transport would be deducted from the numbers below).

Tourism

This is straightforward. We calculate the net revenue generated from tourism activities that would otherwise not exist if the forest didn’t exist.

Biodiversity

This one is tricky. The fact that forests have a biodiversity value is widely understood. The difficult part is quantifying that value — owing to indirect causal relationships and difficulty of obtaining the full scope of data that is needed. Below are a few metrics that could be used, but none of them are easy to calculate.

• The economic impact on agricultural production resulting from the decline or disappearance of pollinator species and/or seed dispersing species in the region.
• The economic impact on agricultural production resulting from pest damage caused by imbalances in insect species distribution and abundance (which, in turn, can be triggered by imbalances in bird, amphibian, or mammal imbalances).
• The potential pharmaceutical value derived from plants or animals that could go extinct. This is a real concern in places like the Pacific Forest of Ecuador, with extremely high rates of biological endemism and, accordingly, a high risk of species extinction — particularly of plants and amphibians, which are the source of many of humanity’s most important medicines. But this is extremely difficult to quantify and should probably be excluded from the biodiversity valuation.

Health & Well-Being

“Health” includes physical, emotional, and psychological health for human inhabitants that live in the project area and/or visit it for reasons of health, recreation, and well-being.

Similar to biodiversity, the health & well-being value of a forest is difficult to quantify. But it’s not impossible. Below are a few options.

• Use computer models to estimate health care expenditures for respiratory illness for nearby residents if the forest (which filters air) was replaced with whatever land-use alternative is most likely.
• The same could also be attempted for mental health care expenditures — the assumption being that people who live near intact forests have a lower incidence of mental health illness.
• If we acknowledge that forests improve both respiratory and mental health, and that respiratory and mental health indirectly influence the incidence and severity of other illnesses (e.g., heart disease and cancer, etc.), perhaps it makes sense to model out the difference in total health care expenditures — again, comparing the “with-forest” and “without-forest” scenarios.

Opportunity Cost

Once the values from each of the five value pools have been quantified and aggregated, the next step is to calculate the opportunity cost of foregoing the unsustainable exploitation of the forest. This can be calculated by summing up the potential value of things like timber, fuel wood, poaching, and minerals that could be cashed in if no effort is made to conserve and/or regenerate the ecosystem.

Investment Cost

Now let’s look at how much it would cost to keep the forest alive and/or restore it to greater health. This is where conservation managers come in handy. We devise a list of actions that need to be taken and estimate what those actions would cost.

Of course, this is easier said than done. As TMA has learned during our fifteen years of work in the Pacific Forest of Ecuador, it takes time to build up a deep understanding of an ecosystem and the human dynamics within it. It also takes time and resources to test out different approaches, build a team, and implement projects.

But most major forests have a confederation of local communities, leaders, and institutions with the collective ability to figure out what needs to be done to protect the natural capital of the forest and enhance the social capital of the people who live amongst it.

A holistic forest-wide action plan is devised, and the cost of implementing is tabulated. This cost, along with the opportunity cost, is subtracted from the gross value of the forest. The resulting number is the net monetary value.

Water value + (Agricultural & Tourism Revenue) + Carbon value + Biodiversity value + Health value — Opportunity cost of unsustainable exploitation — investment cost of conserving/restoring it = Net Monetary Value of the Forest

The house where this article was written — TMA headquarters in the Pacific Forest of Ecuador (Jama-Coaque Reserve).

A Note to Comrades

To my fellow tree-huggers and pagans out there, who love the forest for its intrinsic value, I have two things to say:

1. I’m with you. I would defend the Pacific Forest with my life, if I have to — even if it had no monetary value at all.
2. This article is written for the global community at large, which includes policy-makers and business leaders as well as activists and financiers, and everyone else who is interested in the fate of our planet — which is hopefully everyone.

There is an understandable concern that if forests are expressed in monetary terms, they could become a market commodity and/or privatized, whereupon they could become a victim to the same private interests responsible for the ecological degradation that brought us to this point.

Here’s a useful response to that fear:

“Though these are valid concerns, it could be argued that essential ecosystem services are already being ‘traded’ in precisely this manner, sometimes for an implicit price of zero. Land concessions granted for mining or logging usually do not account for the ecosystem services lost through subsequent land-use change. If nothing else, valuation in combination with liability regulations makes destructive extraction less attractive by adding (usually quite significant) financial costs.” -The Economics of Ecosystems & Biodiversity (TEEB)

In other words, valuation — either implicitly or explicitly — is always involved in human economic activities. If ecosystem services provided by forests are only implicitly valued, whereas all other resources (such as mineral wealth, crop production, timber, etc.) are explicitly valued, the system will prioritize extraction at the expense of ecosystem services and other associated economic, health, and biodiversity values. If the latter are actually more valuable than the former, we have a market failure.

And that’s exactly what’s been happening. It is the “free rider” problem on a planetary scale.

What To Do with the Valuation?

Once the value of a forest is quantified, now what?

Assuming the net value of the forest is positive, it is in the best interests of the human collective to keep the forest alive and, where necessary, take measures to restore it to greater health. The return on investment — from a natural capital perspective — would be positive.

But how do we finance this? Therein lies the trillion-dollar question.

One option is the creation of an International Biosphere Fund, which would be designed in the style of the International Monetary Fund, but with a decidedly different mission: invest in businesses and projects that create ecological resilience and sustainable prosperity.

In other words, a global investment trust — collectively funded by all nations in the UN — with the mandate to distribute funds to projects on a basis of natural capital ROI. Forests would certainly qualify. For a deeper dive into that concept, check out: How to Finance Global Ecological Prosperity: Creation of the International Biosphere Fund, modeled after the IMF

Stewardship via Capitalism?

Whether capitalism can co-exist with long-term ecological stewardship is an open question. Maybe it can’t. But if it can, the universal adoption of natural capital accounting is perhaps our best chance at flipping the paradigm. To get there, the first step is to devise a workable framework to quantify ecological costs and values — and it needs to be much better than REDD+ and all other forms of carbon accounting.

Hopefully this article sheds some light on how that process could unfold. It is meant to be a starting point, rather than a fully realized solution. Many more voices and practitioners are needed to join this discussion.

Links to Interconnected Articles

This article, like a single tree in a forest, is but one part of an interconnected web of other articles. Together these articles represent a coherent vision for forest valuation and stewardship.

• Specifically in terms of carbon valuation, we propose an alternative to REDD+. Check out Replacing REDD+ with the Forest Carbon Ledger: Forest conservation needs a new methodology
• The companion piece for the above article is a case study: Comparing the Forest Carbon Ledger (FCL) to REDD+: Using the Capuchin Corridor in Ecuador as a case study
• Quantifying the value of a forest is only the first step. The next question is: how do we fund forest stewardship on a global scale? Refer to: How to Finance Global Ecological Prosperity: Creation of the International Biosphere Fund, modeled (somewhat) like the IMF

About the Author

Jerry Toth is the co-founder and program director for TMA (Third Millennium Alliance), a nonprofit rainforest conservation organization based in Ecuador. For the last 15 years, TMA has been working to preserve and restore one of the most endangered rainforests on earth: the Pacific Forest of Ecuador. TMA’s current focus is the creation of the 40,000-hectare Capuchin Corridor, which serves as a case study for novel approaches to forest restoration and natural capital financing.

Jerry earned his degree in Economics at Cornell University and was a Hansard Scholar at the London School of Economics. He is also the co-founder of To’ak Chocolate, based in Ecuador.

The Capuchin Corridor in the Pacific Forest of Ecuador, where both the FSFV and FCL methods of forest valuation are currently being piloted.