This problem has been continuing for quite some time and is highly prevalent in the existing literature on valuation of ecosystem services — in general — and values of carbon stock and sequestration in particular.
While valuation of ecosystem services is the mainstay of natural capital (or nat-cap) assessments, the understanding in some of the scientific publications seems to be unsatisfactory. This affects the policy space as well, as often such valuation mechanisms are used for compensatory payments for ecosystem losses. Recently, it has become far more apparent that there is a conceptual issue with the understanding of carbon stock and sequestration as an ecosystem service. This problem has been continuing for quite some time and is highly prevalent in the existing literature on valuation of ecosystem services in general and values of carbon stock and sequestration in particular.
The inherent problem lies in the fact that the notion of ecosystem services are often not properly understood or interpreted. While ecosystem services are the services that the human community obtains from the ecosystem, it needs to be understood that these occur only at the interface of human society and the natural ecosystem. In that sense, ecosystem service is an “anthropocentric” concept. As per classifications of ecosystem services envisaged in the Millennium Ecosystem Assessment 2005 — where ecosystem services are provisioning, regulating, supporting, and cultural — carbon absorption is a regulating service of the ecosystem.
Ecosystem services have often been classified as stock and flow. In economics and finance, the notion of “stock” is defined as the value of an asset at a particular point in time, while a “flow” refers to the total value of transactions that entail values of sales and purchases, incomes, productions, consumption, and investment expenditures during the period. The addition to stock is also delineated as a flow for the concerned period, e.g., new physical capital creation through infrastructure investments like new roads, bridges, or buildings. From the perspective of ecosystem services, stocks, therefore, should refer to the value that is stocked in natural resources but is not yet realised in the form of benefits, while flow benefits relate to the real flow of ecosystem goods and services. Thus, stocks should be potential and unrealised benefits from the ecosystem. The best example here is that of timber stock in a forest. While the forest offers a host of services in the form of provisioning (e.g., felled timber, non-timber forest products, etc), regulating (e.g., carbon storage and sequestration), supporting (e.g., biological control, gene-pool protection), and cultural (e.g., tourism, spiritual); the standing timber stock is simply a store of value and does not enter into the human benefit function till felling happens. Therefore, while placing an annual value to ecosystem services as monetised benefits obtained by the human community for a particular year, we are valuing the flows. It needs to be kept in mind that the benefit to the human community or economy always occurs in the form of flows, though this flow may originate from a stock, e.g., the “natural capital” (biodiversity and natural assets) is a stock that provides us with a flow of benefits which are ecosystem services. Hence, ecosystem services are not stocks, but flows!
Certain scientific report/s on valuation of forest ecosystem services value carbon stock as a stock benefit and juxtaposes it with timber stock, treating them as conceptually identical. They are also being added to arrive at the stock value of the ecosystems. This is problematic! As stated, the timber stock value — product of total cubic metres of timber with its market price — is purely a store of value that may have a potential use in some other period. However, the carbon stock is not a store of value but provides a flow of value. Atmospheric CO2 is not a benefit (or service) to the humanity, but a cost (or disservice). It is not only from the perspective of global warming that it causes a host of negative impacts on the economy, but also from the perspective of health costs, lowered productivities, and negative impacts on the GDP that the economy has to bear the cost of enhanced CO2 in the atmosphere. Therefore, it cannot have a price (as this is not a “good” that offers a positive “utility at the margin”), rather it is associated with a cost that is imposed on the society.
Forests sequester carbon in a process that removes carbon dioxide from the atmosphere. Through the process of photosynthesis, the carbon content — assumed to be 27 percent of CO2 — gets stored by the forest, while the remaining 73 percent, i.e., oxygen (O2), gets released. The carbon is then stored in the forest within living biomass, soil, and litter and contributes to the forest carbon stock. This is a periodic process. In most studies on ecosystem service valuation, it is this sequestered carbon that is taken into account as a flow benefit, and not the carbon storage as a whole. Now, what one needs to note here is that the total carbon storage as also the newly sequestered carbon is a flow benefit! The carbon stock, if released from the forests, will add up to our “disutility.” Therefore, every moment or every year, the forest offers us the benefit of the stored carbon as also the sequestered carbon by helping us avoid the cost that the released carbon would have imposed on us.
The importance of the Social Cost of Carbon (SCC) lies in the fact that it attempts to reflect on all the potential quantifiable costs of emitting one additional tonne of CO2, in monetary terms. In that sense, this value reflects on the benefits of reduced atmospheric carbon through a cost saving approach. Hence, the forest — which arrests the carbon — renders this value as a regulating service flow to the human community every year. The forest acts as a regulating reservoir at every moment in time by arresting the release of carbon to the atmosphere; thereby, helping society not to incur the cost. Hence, every year, the stock of carbon already arrested in the forest and the addition to the stock arrived at through the quantity sequestered provide flow benefits. In other words, carbon’s negative value gets converted to a positive value every year through the retention of the existing stock and by addition to the stock through sequestration. Both entail ecosystem service flows. This was also acknowledged in the Kanchan Chopra Committee Report that set up the principles for estimation of Net Present Value (NPV) for forestland diverted for non-forest use.
In here, the SCC emerges as a better price mechanism than the market price of carbon credits, which some reports and studies have often considered for valuation. Certified Emission Reduction (CER) or Verified Emission Reduction (VER) prices are subject to market fluctuations. During the economic boom prior to 2007, CER prices reached a peak, but completely lost momentum after the sub-prime crisis in the US and the economic slump in the EU. This is because of the slowing down of industrial activities that resulted in a decline in demand for carbon credits. But that does not imply that the damages from carbon emissions have declined or the values per unit of carbon sequestration by the forests have changed. Market prices are discovered on the basis of better information mechanism, and carbon markets are largely incomplete and imperfect. Therefore, if one needs to look at the opportunity cost of forest carbon, the mechanism to look at is the SCC.
It further needs to be remembered that for valuation of forest ecosystem services, the biomass component should be taken into consideration while accounting for carbon storage benefits including sequestration. This is because of delineating the opportunity cost of forest degradation. The carbon stock generally consists of the total biomass — sum of above-ground biomass (AGB) and below-ground biomass (BGB) — deadwood, litter, and the soil organic carbon. Generally, it is the carbon sequestration which is taken into consideration while conducting annual valuation considering that it is the only flow benefit. However, the more scientific way to look at the annual forest ecosystem service value is simply to look at the opportunity cost aspect. Deadwood and litter generally constitutes a very small component (less than 0.5 percent) of the total carbon stock. If, hypothetically, the forest is decimated from the face of the planet, what is lost is the total biomass stock including the newly sequestered component. There is no scientific evidence to state that the soil organic carbon will encounter any impact due to forest destruction. Therefore, in terms of valuing carbon stock as a regulating service, one needs to take into consideration the sum of AGB and BGB and multiply the same by the SCC.
Through the above arguments, we establish that: a) ecosystem services are flows, not stocks, and carbon storage results in flow of benefits every moment; b) social cost of carbon should be the basis of valuing the benefits; and c) ecosystem services of forests from carbon storage should be valued by taking total biomass, and leaving out soil carbon. There is a critical need to correct our nat-cap assessment methods with these three aforementioned aspects.
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Dr. Nilanjan Ghosh is a Director at the Observer Research Foundation (ORF), India. In that capacity, he heads two centres at the Foundation, namely, the ...
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