Welcome back, dear Friend! In the previous trainings, we talked about the reasons behind pollution and overconsumption of natural resources in a forest. One of these reasons is that people prioritize consumptive and extractive uses of the forest ecosystem and undervalue the non-use and indirect use benefits of this ecosystem. We also talked about how we can integrate non-use values of the forest ecosystem into development and management planning. We used the ValuES framework for this approach.
Unfortunately, while implementing the ValuES framework, we may end up not with one, but several feasible and attractive options. All of them may promise great benefits to both stakeholders and our forest ecosystem. Which option should we choose then? How can we decide on the best possible option?
Unfortunately, pursuing multiple options is not really feasible and may even not be entirely realistic, because we usually have limited human, financial, technical resources, and time, which is also a resource. So, in choosing the right option, we need to see what the criteria of our decision-making are. These can be the criteria related to economic feasibility and economic benefits, social ethics (who wins and who loses in each scenario), and in general whether there are sufficient resources to cover all needs of the project. Because one project can be relatively cheap and easy to implement, but it will offer very few benefits, while another project may require the entire variety and amount of resources that we have, but at the same time offer much more benefits and much greater value to the forest and our stakeholders. Also, we need to consider one more criterion that is kind of tricky to account for. We are talking about opportunity costs.
Opportunity costs are a special category of economic costs. These are potential benefits and gains forgone due to the choice of one particular alternative among the multitude of different options. For example, these can be all the benefits that we, people using this forest, lose if one particular choice, one particular decision regarding this forest is implemented. So, we lose all the benefits entailed to all other possible options of using this forest. A very clear case is that if the state chooses to cut down all these trees and to clear all the forest in order to gain some economic profit or this is lobbying from some logging company, then we as its visitors will lose all the benefits of enjoying this beautiful autumn forest and its ecosystem, of breathing its fresh air, of enjoying recreation among the woods, and of many other ecosystem services.
Another example that we can use to illustrate opportunity costs is a very common management dilemma for a forest ecosystem. One option of using this relatively unmanaged forest can be to designate it as an ecotourism reserve, a national park, to build some eco-trails here and some places for recreation, and then allow tourists to come and enjoy its ecosystem services. The opportunity costs here are that we would have not so rich biodiversity and less qualitative ecosystem service, which we would have had if this would be, let’s say, a protected area. So, in the case of the second option, a protected area or reserve, we would have opportunity costs of all the profits that we could have gained from tourists if we would have this as an eco-tourism area, a national park. And, of course, there is the third alternative: if, like I have said earlier, the state decides to cut down this forest and use it for profits and for export of timber, then we would not have options and benefits from the two alternative scenarios that I have presented earlier.
The issue with the opportunity costs is that they can relate not only to alternatives on one particular site, like one forest, but to different areas and scenarios in different places at once. For example, if we choose to protect this forest, we might not offer sufficient protection to other forests in the country.
What it means for our forest management planning is that we should consider options that can be realized within the limits of our financial, human, and technical capacities. We also need to consider the options that minimize our costs while maximizing expected benefits of our choice. And these benefits should not only exceed budget costs, but also the opportunity costs of not pursuing all other alternatives that we have. Only in this case we can be sure that we have chosen the forest management proposal, which is economically feasible and attractive and which is the optimal solution for our targeted forest.
To aid us in such complex decision-making, there are numerous approaches to comparing alternative projects and options between each other. One of the most well-known and hence commonly used approach is called Cost-benefit Analysis, or CBA for short.
Cost-benefit Analysis is an economic approach to estimate expected benefits of a project and to compare it with its costs. It can be applied to an individual project, where we compare its expected benefits and costs to see whether the project is worth pursuing. Or it can be applied to a variety of alternatives that we need to choose from, so that we could see the ratio of expected benefits and costs of each option and then decide, which of these alternatives are worth going forward with.
How can this help us in our forest management planning and decision-making? Well, firstly, we can see which options in our list have benefits exceeding costs, and we can immediately take them towards the next step, while those, where the benefits-to-costs ratio is less than one, we can immediately exclude as unfavourable ones. Then, at the next step, we will work with the options and solutions, where ratio of benefits to costs is greater than one, and will proceed to choosing the best ones among all the options and pursuing the ones, where the expected benefits are the greatest.
In CBA, benefits and costs are expressed in a single metric - monetary units. Therefore, economic valuation of ecosystem services is very crucial at this stage, so that we could capture the economic value translated into the “language” of money in our cost-benefit analysis and compare it to the costs of implementing one project or the other.
Ecosystem services provide benefits and value not only at the present moment, but also far into the future. So, in our Cost-benefit Analysis, we need to consider all the future flows of our benefits. At the same time, costs may occur at the present moment as implementation costs and as maintenance and management costs that extend into the future. However, psychologically we prioritize current benefits and costs over the ones occurring in the future. So, in our cost-benefit analysis, we need to reduce gradually the economic value of benefits and also costs to the present moment. In scientific language, it means that we discount future flows of benefits and costs to their present values.
What we get as an output of our CBA exercise is a comparison between the discounted flows of all the expected benefits that we would receive if we implement each of our proposals and the costs that we would incur from the implementation of each of our alternatives. In the end, we want to see that the higher the net present value of a particular project is, the more promising and the more desirable this particular choice that we could take on and pursue is.
Certainly, CBA has its drawbacks and disadvantages. For example, how can we integrate non-monetary significance of a forest and the intrinsic value of the forest ecosystem to people and specifically indigenous communities? And how can we also add and consider in CBA ethical and moral considerations that would make our decision in the end not only cost-efficient, but also ethically and morally correct to people.
For such cases, there are other analytical and decision-making approaches. For example, we can use the multi-stakeholder analysis, where we invite representatives of all our key stakeholders for deciding on the options together, weighing all the pros and cons of each option, and finally making the appropriate decision. Certainly, there are a lot of ways and plenty of knowledge about this multi-stakeholder approach, this cost-benefit analysis, and other methods. You can look for them on the webpage of our course.
However, by now we touched upon the subject of stakeholders. And you may be wondering, “Who are these stakeholders?”, “Who should we consider in our decision-making and forest management action plan?”, and finally “Who should we communicate the results of our economic valuation and cost-benefit analysis?” These are very good questions, and we will certainly explore them in the next training and the third chapter of the course. See you there!
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