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Pay for the Damage to Ecology : The Supreme Court

States in India recover from the user agency the NPV of such land which has been diverted for non-forest use so as to compensate for the loss of tangible as well as intangible benefits flowing from the forest lands. Madhya Pradesh and Chhattisgarh recover the NPV at the rate of Rs 5.80 lakh per hectare to Rs 9.20 lakh per hectare of the forest land depending upon the quality and density of the forest land diverted for non-forestry use.

The underlying principle for recovery of NPV was that the plantations raised under the compensatory afforestation scheme could never adequately compensate for the loss of natural forests as the plantations require more time to mature and even then they are a poor substitute to natural forest. It noted that States/Union Territories as well as MOEF are of the view that in addition to the funds realized for compensatory afforestation, the NPV of the forest land being directed for non-forestry purposes should also be recovered from the user-agencies.

The Supreme Court in its judgment on 26th September 2005 (the Bench had Justices Y.K.Sabharwal, Arijit Pasayat and S.H.Kapadia) deliberated on the question of the guiding principle to be laid for determining the NPV. It made reference to opinions of various experts laying down as to what is the concept of NPV and how it is to be calculated. It also addressed the question about the legal and jurisdictional basis to levy NPV. While doing so the Apex Court faced an interesting issue. "Most of the States did not object to the recovery of the NPV from the user-agency but strenuously urged that since the land under the forest belongs to the State, the amount deposited by the user-agency as NPV shall be paid to them. It was also contended on behalf of the States that there should be no NPV on degraded forest. The further submission was that all public utility projects shall be exempted from payment of NPV." On the other hand, Harish Salve, Amicus Curiae contended, relying upon the principles of inter-generational equity and sustainable development, that forest is a part of eco-system and, therefore, the value to be put and calculated is not only on trees and leaves but the basis has to be the preservation of bio-diversity. He argued that NPV was to be levied and collected not because property rights of the States but on account of effect on ecology by conversion of forest land for non-forest purpose. Salve submitted that the basis for calculation of NPV should be the economic value, spread over a period of 50 years, which would be regenerational value for forest regeneration to be taken into account as opposed to restoration value, i.e., financial value. Regarding legal and jurisdictional basis to levy NPV, Salve contended that there were various legal principles which acted as source of power to levy NPV.


Based on such deliberations the Court considered the meaning of NPV and determined what is NPV. "The NPV is the present value (PV) of net cash flow from a project, discounted by the cost of capital. Forestry is a public project. It is important to bear in mind that a benefit received today is worth more than that received later. The benefit received today is in fact 'cost incurred' today. Time value of the cash inflow/outflow is important in investment appraisal. NPV is a method by which future expenditures (costs) and benefit are levelised in order to account for the time value of money. The object behind NPV is to levelise costs. What is the value of Rupee today would not be the value of Rupee say 50 years later."


"For example, let us have the starting point of value of Rupee in India in the year 2005 and analyse it with the value of Rupee that may be in the year 2050. Cost incurred or to be incurred in 2050 have to be discounted by using appropriate parameters like rate of discount, gestation period, ratio of deflators to GDP. Therefore, expenses incurred in each year between say 2005 and 2050 have to be brought down to their present values by using appropriate discount rate in the NPV. The project like forestry has long gestation period of 40-50 years. It goes through cost cycles each year depending upon inflation, rate of interest, internal rate of return etc. Therefore, costs for the year 2005 will differ from the cost of 2006 and cost of 2006 will differ from that of the year 2007 and so on and so forth. However, this constitutes what is called as conventional method of accounting cost which does not take into account social and economic cost of diversion of forest. Cost is a function of the discount rate (a measure of the value of capital) used. Under NPV, all costs are discounted to some reference date which we have taken as 2005 for illustration. The total cost reckoned at this reference date is the sum of present value or future value of costs discounted to the year 2005. Similarly, one can calculate the present value of the revenues from the expected benefits of forest regeneration.


Next was the question: Then why charge NPV? The court observed : In the case of a conventional project like Hydro-electric Project, the accounting procedure is normally based on Return On Investment (ROI) in which the unit cost of energy includes return on capital, investment, depreciation of capital, annual fuel cost and operational and maintenance costs. However, ROI excludes the time value of money. It also excludes the gestation period of the project. Therefore, we have the NPV method which discounts future costs and future benefits by use of appropriate discount rate and brings down such costs and benefits to the reference date which in the present case has been assumed to be the year 2005.


The question, which we have to answer, is concerning the relevance of fixing appropriate discount rate in valuation of the costs and benefits arising from forestry as a project. The value of any asset is discounted by present value of the economic benefits it will generate in future years. For example, timber asset value is the discounted future stumpage price for mature timber after deducting costs of bringing the timber to maturity. NPV is one of the methods for valuation of standing timber. The general expression V for the value of an asset, in the base year O, is simply the sum of the net economic benefits it yields in each year over the life time, T, of the Asset, discounted to the present value by the discounted rate. The current method of valuing public sector projects, like forestry, has become contentious as public sector undertakings agree for lower discount rate on account of long gestation period. However, the flaw with this argument is that the low rate of return is computed without including the intangible or environmental impacts/benefits emanating from forest.


How does one value the intangibles? There are several methods, viz, opportunity cost, replacement cost, travel cost, contingent value method (CVM) and social benefit cost analysis (SBCA). SBCA can be applied to the evaluation of environmental impacts of forestry projects. Here, one must appreciate that the environmental outputs from forests appear as public goods for which there is no market. Various environmental outputs can be classified into this category, namely, Flood Control Benefits, Water Production, Soil Conservation, Outdoor Recreation, Biodiversity & Conservation, Habitat and Air Purification.


The problem in valuation of the above is: allocation of fixed costs according to the contribution of each product in total revenue. This is because except contribution of timber product, contribution of the other above-noted outputs is not known, especially intangible outputs. However, under SBCA, benefits from each of the above environmental outputs are identifiable. For example, flood control benefits arise because of the role of forests as stream regulator. Similarly, valuation method for each of the above outputs differs. In valuing biodiversity, CVM is useful. SBCA is helpful in placing monetary value on carbon storage on air purification. The point is that for each of the above functions of the forests, different methods of valuation have to be applied. Various methods have been used to estimate the value of environment like CVM, Opportunity Cost Method, Travel Cost Method, SBCA etc."


The Court knew well enough that to evaluate and assess it would require expert advice. Hence the suggestion , "It would be appropriate if a body of experts examine the aspect and report to this Court suggesting the best method depending on factors like gestation period, rate of discount (interest), density of the forest, social benefits of the project undertaken by PSU etc. They will take into account economic values associated with forests, viz., direct use values, indirect use values such as value of environmental benefits from the forest, option values and existence value."


NPV helps levelising the costs of public projects like forestry. It is an important tool of SBCA. Under SBCA, benefits from each of the above environmental outputs are identifiable. Hence, applying NPV, one can allocate levelised costs according to the contribution of each product in the total revenue. It is important to bear in mind that a benefit or cost received or incurred now is worth more than that received or incurred later. Therefore, using the appropriate discount rate helps to aggregate marginal benefits and costs. The choice of interest rate depends upon time preference. For public project, such as forestry, a social discount rate, which indicates time preference of the society, should be used.


Forest sustainability is an integral part of forest management and policy that also has a unique dominating feature and calls for forest owners and society to make a long-term (50 years or longer) commitment to manage the forest for future generation. One of the viewpoints for sustaining forest is a naturally functioning forest ecosystem. This view point takes a man and nature relationship to the point of endorsing to, the extent possible, and the notion of letting forest develop and process without significant human intervention. A strong adoption of the naturalistic value system that whatever nature does is better than what humans do, this is almost the "nature dominates man" perspective. Parks and natural reserve creations; non-intervention in insect, disease and fire process; and reduction of human activities are typical policy situation. This viewpoint has been endorsed by 1988 Forest Policy of Government of India. Yet another viewpoint recognizes the pragmatic reality faced by the governments and the administrative, namely, trees don't vote while people do.
Some of the criteria reflecting key elements of ecological, economic and social sustainability are:
  • Conservation of biological diversity.

  • Maintenance of productive capacity of forest ecosystems.
  • Maintenance of forest ecosystem health and vitality.

  • Conservation and maintenance of soil and water resources.
  • Maintenance of forest contribution to global carbon cycles.
  • Maintenance and enhancement of long-term multiple socioeconomic benefits to meet the needs of societies.

  • Legal, institutional and economic framework for forest conservation and sustainable management.


An expert dealing with principles and applications of forest valuation, on the aspect of value of inputs and outcomes and conditions, says:"Decision making in forest management requires that we understand the relative values of inputs, outcomes, and conditions. Cost values for inputs such as labour, capital, interest, supplies, legal advice, trades, and other management activities as well as the market value of existing timber stands are relatively easy to obtain. Outcomes or resulting condition values are more difficult, but we need measures of the values of timberland, recreation, water, wildlife, visual amenities, biodiversity, environmental services, and ecological process to help guide management decisions. By understanding market, social and other values of forests, we can better allocate our scarce and valuable resources to attain the desired mix of outcomes and conditions."

The emphasis is on ecosystem, management philosophy that has greater emphasis on integration, biological diversity and ecological processes. In respect of working economic values of the outcome, it is said: "In real world forest management situations, decision makers are faced with several alternatives and potentially large sets of criteria related to the ecological, economic and social impacts of these alternatives. It would be very easy to generate a nearly incomprehensible table that documented every physical, biological, economic, and social outcome and condition resulting from each management alternative. Such information could include outcome levels for water yield, sediment production, and timber growth; population trends for important wildlife species; and recreation use for backcountry and developed recreation sites. Similarly, information on the economic value of these outcomes can be estimated by means of suitable methods. To this avalanche of information, we could add the impacts on the social well-being of local and regional communities. The forest management analyst can easily overwhelm the decision makers and stakeholders with information."

Dealing with fundamental of decision analyses to achieve ecological, economic and social goals, it is said that what is to be broadly kept in view is: "Ecological and environmental goals are important to forest managers, landowners, and their stakeholders, we need information about how decision alternatives affect such goals.
These goals can be broadly stated as:
  • Maintaining and enhancing forest productivity

  • Conservation of biological diversity

  • Protecting and enhancing environmental conditions."


The aforesaid also shows that NPV as a tool of SBCA is required to be based on Total Economic Value (TEV). It indicates the components of TEV. It further shows what are the type of agency or experts which are required to examine these issues.What has economics got to do with environmental management? Economics is the science of explaining the behaviour of different agents who take part in production, consumption and distribution activities in the economy and make decisions regarding the use of resources. Environmental economics focuses on market and non-market behaviour of different agents in the society regarding natural and environmental resources, viewed from intergenerational, inter-temporal and different institutional frameworks. Economic theory always makes a distinction between value and price. Why value natural resources specifically? Since there is no market for ecosystem services such as nutritional cycle, carbon sequestration, watershed functions, temperature control, soil conservation etc. Even if one assumes that there are markets, such markets do not do their job well. This market may be regulated one. There may be restrictions on entry as a result of licensing or rationing introduced by the Government. For the above reasons, it is concluded that valuation beyond the present is necessary and for natural resource Accounting NPV method is a must. Mr. Salve advocates for Total Economic Value (TEV) on the ground that TEV expresses the full range of value or benefits - both tangible and intangible. Basically, it is understood that natural and environmental resources provide several 'use values' and 'non-use values' to enhance human welfare and provide sustainability to all lives (often termed as anthropogenic values). Conceptually, it is the sum of use values (UV) and non-use value (NUV) which constitutes the TEV. There can be further elaborations of UV, option value (OV) non-use value (NUV). The UV, it is stated, can be broadly classified into three groups - direct, indirect and option values.
  • Direct Use Value (DUV) refers to the current use (consumption) of the resources and services provided directly by natural and environmental resources. Examples are the use of timber and non-timber forest products. Recreation (tourism to wildlife sanctuaries or Himalayan Glaciers, mountains), education, research etc., are examples of direct non-consumptive use values.

  • Indirect Use Value (IUV) generally refers to the ecological functions that natural resource environments provide. It can be broadly classified into three groups: watershed values, ecosystem services and evolutionary processes.

  • The Optional Value (OV) is associated with the benefits received by retaining the option of using a resource (say a river basin) in the future by protecting or preserving it today, when its future demand and supply is uncertain. An example is the Narmada river basin.


The court did not delve further in this matter "since ultimately it would be for the experts to examine and assist this Court as to the Model to be adopted for valuation, namely, TEV, CVM, SBCA etc. It is for the experts to tell us as to what NPV should be applied in case of mines and different types of forests. We may only note that basis of these valuations is the theory of sustainable development, i.e., development that meets the needs of the present without compromising with the ability of future generations to meet their own needs. Despite various elaborations, definition of sustainable development, though very old, still is widely accepted world over and has been reiterated by this Court.


Regarding the parameters for valuation of loss of forest, we may only note as to what is stated by Ministry of Environment and Forests, Government in its handbook laying down guidelines and clarifications upto June 2004 while considering the grant of approval under Section 2 of the FC Act. Dealing with environmental losses (soil erosion, effect on hydrological cycle, wildlife habitat, microclimate upsetting of ecological balance), the guidelines provide that though technical judgment would be primarily applied in determining the losses, as a thumb rule, the environmental value of one hectare of fully stocked forest (density 1.0) would be taken as Rs126.74 lakh to accrue over a period of 50 years. The value will reduce with density, for example, if density is 0.4, the value will work out at Rs 50.696 lakh. So, if a project which requires deforestation of 1 hectare of forest of density 0.4 gives monetary returns worth over Rs 50.696 lakh over a period of 50 years, may be considered to give a positive cost benefit ratio. The figure of assumed environmental value will change if there is an increase in bank rate; the change will be proportional to percentage increase in the bank rate.

A researcher, Ms. Kanchan Chopra, while conducting the case study of Keoladeo National Park in respect of economic valuation of biodiversity at the institute of economic growth, Delhi examined the question as to what kind of values are to be taken into consideration. As per the study, different components of biodiversity system possess different kinds of value
(1) a commodity value (as for instance the value of grass in a park),
(2) an amenity value (the recreation value of the park) and/or
(3) a moral value (the right of the flora and fauna of the park to exist). It is recognized that it is difficult to value ecosystem, since it possesses a large number of characteristic, more than just market oriented ones. It also leads to the need to carry out bio-diversity valuation both in terms of its market linkage and the existence value outside the market as considered relevant by a set of pre-identified stakeholders. It is, however, evident that while working out bio-diversity valuation, it is not trees and the leaves but is much more. Various techniques for valuing biodiversity that have been developed to assess the value of living resources and habitats rich in such resources have been considered by the author for her case study while considering the aspect of value, their nature and stakeholders interest. In so far as the value of ecology function in which the stakeholders or scientists, tourists, village residents, non-users, the nature of value is regulation of water, nutrient cycle, flood control. These instances have been noted to highlight the importance of the biodiversity valuation to protect the environments. The conclusions and the policy recommendations of the author are:


"Biodiversity valuation has important implications for decision making with respect to alternative uses of land, water and biological resources. Since all value does not get reflected in markets, its valuation also raises methodological problems regarding the kinds of value that are being captured by the particular technique being used. "

Simultaneously, in the context of a developing country, it is important to evolve methods of management that enable self-financing mechanisms of conservation. This implies that biodiversity value for which a market exists must be taken note of, while simultaneously making sure that the natural capital inherent in biodiversity rich areas is preserved and values which are crucial for some stakeholders but cannot be expressed in the market are reflected in societal decision making. A focus on both the above aspects is necessary. It is important to take note of the nature of market demand for aspects of biodiversity that stakeholders, such as tourists, express a revealed preference for by way of paying a price for it. Simultaneously, it is important to examine the extent to which a convergence or divergence exists between value perceptions of this and other categories of stakeholders. It is in this spirit that two alternative methodologies are used here to arrive at an economic valuation of biodiversity in Keoladeo National Park. The travel-cost methodology captures the market-linked values of tourism and recreation. It throws up the following policy implications :
(1)Keeping in mind the location of the park and the consequent joint product nature of its services, cost incurred locally is a better index of the price paid by tourists. It is found that demand for tourism services is fairly insensitive to price. A redistribution of the benefits and costs of the park through an increase in entry fee would not affect the demand for its services.
(2) Cross-substitution between different categories of stakeholders can improve the financial management of the wetland. A part of the proceeds can go to the local management. Also, high-income tourists, scientists and even non-users with a stake in preservation can pay for or compensate low-income stakeholders for possible loss in welfare due to limits on extraction and use.
(3) However, the limit to such a policy is determined by the number of visitors and their possible impact on the health of the wetland. Such a constraint did not appear to be operational in the context of the present park. Identification and ranking of values of different aspects of biodiversity resources as perceived and expressed by different categories of stakeholders namely scientists, tourists, local villagers and non-users is an important object in the process of valuation. In the KNP study, a fair degree of congruence with respect of ecological function value and livelihood value is discovered to exist in the perceptions of diverse groups. Stakeholders as diverse as scientists, tourists, local villagers and non-users give high rankings to these uses."

The Court also deliberated on the identification of experts. Counsels agreed that Institute of Economic Growth is an institute of eminence having been set up about half a century earlier. The Court had no objection in using the services of experts from such eminent institutions. The other issue was the contention of Mr. Venugopal who, appearing for State of Kerala, submitted that the NPV amount received should come to the State. Referring to Notification dated 23rd April, 2004 constituting CAMPA, learned counsel contended that clause 6.4 of the said Notification, which deals with disbursement of the funds, does not envisage the amount being disbursed to the State Government. He also challenged the constitutional validity of the Notification. The contention put forth is that the Notification does not have any Parliamentary or Legislative control.


Referring to various clauses of the notification, it was contended that fund sought to be created under CAMPA lacks accountability and puts aside financial control. There is a total lack of financial discipline which, learned counsel contends, is against the constitutional framework. It was further contended that the forests vest in the Government; the same are State properties and, therefore, all amounts received shall go to Consolidated Fund of India or Consolidated Fund of the State or to Public Funds, as the case may be. Reference has also been made to the provisions of the Comptroller and Auditor-General (Duties, Powers and Conditions of Service) Act, 1971 (for short, the 'CAG Act') and the submission is that no provision under the Notification shows that the account can be subjected to audit under the CAG Act. The contention, in short, is that constitutionally it is not permissible to any person or authority to hold funds collect on behalf of the Government.

The duty to preserve natural resources in pristine purity was highlighted in M.C. Mehta v. Kamal Nath & Ors. [(1997). After considering the opinion of various renowned authors and decisions rendered by other countries as well on environment and ecology, this Court held that the notion that the public has a right to expect certain lands and natural areas to retain their natural characteristics is finding its way into the law of the land. The Court accepted the applicability of public trust doctrine and held that it was founded on the ideas that certain common properties such as rivers, sea-shore, forests and the air were held by the Government in trusteeship for the free and unimpeded use of the general public. In view of this, the Court held that the natural resources are not ownership of any one State or individual, public at large is its beneficiary and, therefore, the contention of Mr. Venugopal that the amount of NPV shall be made over to the State Government cannot be accepted.

On the question of exemption of certain projects from payment of NPV the court concluded that except for government projects like hospitals, dispensaries and schools all other projects shall be required to pay NPV. The amounts are required to be used for achieving ecological plans and for protecting the environment and for the regeneration of forest and maintenance of ecological balance and eco-systems. The payment of NPV is for protection of environment and not in relation to any propriety rights. Fund has been created having regard to the principles of intergenerational justice and to undertake short term and long-term measures. The NPV has to be worked out on economic principles.The user agencies shall give undertakings for the further payment, if any, as may be determined on receipt of report from the expert body. The Special Purpose Vehicle shall be established with the permission of the Court.

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