What is environmental income?

Abstract

A growing number of studies have revealed the dependency, particularly of poor people, on income from wild and uncultivated resources. Inclusion and analysis of environmental income are important in diagnosing the extent of poverty, for understanding its causes, and in identifying policies for its alleviation. The concept of environmental income is, however, poorly developed. Different studies use different measures, while underlying assumptions are often neglected or only partly revealed. In this paper, we analyze the concept of environmental income with respect to its sources, appropriate income measures, and ways of separating environmental income from non-environmental income. We argue that natural rent realized, through consumption or alienation, within the first link of a market chain provides a precise and logically consistent measure of environmental income under conditions of perfect competition. Because of frequent imperfections in rural markets, however, and because estimation of rent may be infeasible, a value added measure may sometimes have to be substituted. Regardless of which of the two concepts is chosen, explicit specification would represent a significant improvement in much of the current literature.

Introduction

Why should we care about environmental income? First, it is important to correct diagnosis of poverty. If significant sources of income are neglected in that diagnosis, our understanding of poverty will be distorted. Based on rigorous field work in Zimbabwe, Cavendish (1999) makes a compelling case that environmental income, much of it falling outside of what is captured in standard poverty assessments, can be quite significant, especially for the poorest of the rural poor. In his study, the lowest income quintile derived more than 40% of total income from the environment (excluding crop production). Later work by Vedeld et al. (2004) has widened the empirical basis for that case in a meta-study comprising more than 50 studies from numerous developing countries. This study revealed a median forest income of more than 20% of total median income. Tracing the exact source of income (environmental or non-environmental) may be of limited relevance to poverty surveys whose only objective is accurately to measure income poverty, as long as all sources are indeed included. The environmental income concept can, however, be helpful in enhancing our poverty diagnosis by focusing attention on neglected sources of livelihood.

A second argument for the importance of considering environmental income is related to policy responses to the poverty analysis. Almost 60 developing countries have by now articulated Poverty Reduction Strategy Papers (PRSPs) as the foundation for concessional lending and grant aid from the major donors. Given their increasing role in guiding international transfers, environmentalists have begun to take an interest in the extent to which environment is “mainstreamed” in this context (Bojö et al., 2004). More specifically, the argument has been advanced by several major development institutions that there are opportunities for advancing poverty reduction by attention to better environmental management, and vice-versa (DFID et al., 2002). A clearer understanding of how poor people are dependent on their environment – the nature and extent of their environmental income – is fundamental in shaping policies that safeguard and develop environmental assets for the poor in a targeted manner. Even when the percentage contribution from natural resources is relatively small, income from these resources may be of vital importance to people living close to the survival line. In particular, environmental income may permit gap filling in times of predictable income shortages and act as a safety net after shocks (Angelsen and Wunder, 2003).

The idea that nature provides significant direct benefits to humans has become a forceful one in development and conservation debates. Contributions range from attempts to estimate the value of the global ecosystem services (e.g. Costanza et al., 1997) to village level estimates of forest incomes. Analysis of the importance and role of environmental income is, however, hampered by the lack of a clear understanding and application of the concept. The widely disparate ways in which the concept is applied by different researchers make comparisons across cases difficult. Such disparity is no doubt due to the many different objectives and approaches – resource valuations, household economic surveys, stakeholder analyses – brought to the study of income from natural resource inventories. Before any broad conclusions can be drawn about the importance of environmental income to poor people's livelihoods, however, agreement must be sought about the exact meaning of the term. Confusion is, moreover, not limited to cross-case comparisons; implicit treatments of the concept may vary across different goods within the same study (Vedeld et al., 2004).

The purpose of this paper is to analyze the concept of environmental income and to suggest a clear and operational definition. How is environmental income different from other types of income? A microeconomic perspective informs our analysis of environmental income; we are concerned with income that accrues to individuals or firms rather than income that accrues to nations or regions, where quite different indicators are appropriate. We assess different definitions of environmental income in terms of their theoretical soundness and practical applicability. The choice of environmental income concept has important implications for the conduct of field studies where such income is believed to be of significance.

In the search for a definition, three interlinked issues are of prime importance: first, the possible sources of environmental income; second, the appropriate income measure; and third, the distance from the source – in geographical or economic terms – at which environmental income may be captured. Before considering these, however, we take a brief look at how nature and its economic gifts have been regarded in the past.