How tokenization can help value natural resources
Natural resources are the main treasure of our planet. In recent years, governments of different countries have taken steps to manage and preserve important resources even more efficiently. To properly control such liabilities, it’s necessary, among other things, to correctly evaluate and account for capital assets, including valuing natural assets. But how can natural capital be valued? Tokenizing natural capital assets can help here to some extent. This article will look at the existing options for natural resource valuation and how tokenization can improve this task.
What approaches are there for valuing natural resources?
To begin with, let’s consider why you should value natural resources. It’s pretty simple here: by assigning a value to any asset, you can use it to attract investment and get better regulatory protection.
How is valuing natural assets performed? Traditionally, a strictly quantitative approach has been used to measure this kind of capital. But whatever numbers you get, they won’t tell the whole story. These indicators often do not reflect the non-monetary benefits of natural resources and the sunk costs associated with their loss or do not consider the sustainability of these vital resources in the future.
The challenge for governments and private organizations is to create a credible valuation and reporting system that helps conserve natural resources, use them wisely, and attract investment.
Among the traditional approaches to valuing natural assets are:
- Cost approach
- Differential rent
- Economic efficiency
- Opportunity cost
- Market valuation
- Overall economic value
We’ll look at some of these methods in more detail below.
The cost method assumes that the basic assessment of natural resources is the investment of labor and funds in the reproduction of resources. At the same time, the quality of resources acts as an additional valuation factor. To calculate the cost of one hectare of land, forest, water, mineral, or other types of natural resources, a certain formula is used, including the ratio of yield to the cost of producing an agricultural product in the assessed area, multiplied by the cost of developing one hectare of land in modern conditions.
This concept of valuing natural assets has become more popular in recent years. It is based on the calculation of differential rent. The essence of the rent approach to the economic valuation of natural resources is that its value is determined by the size of the differential rent brought by a given resource.
Differential rent shows the amount of economic gain that the resource’s owner (state, company, or individual) receives from the more favorable natural properties of the resource (better climatic conditions, the convenience of location, etc.). Using this approach, when determining the value of a particular natural resource, one can consider the influence of territorial differences. For example, plots of land with different fertility and location can bring additional profits to the producer.
It is worth highlighting two main types of this approach to valuing natural assets: absolute and comparative economic valuation.
An absolute economic valuation is necessary to establish the amount of payment and acceptance of natural resources on the balance sheet of enterprises transferred to them for perpetual use, as well as to reflect natural resources as part of the national wealth. This type of assessment indicates the number of capital investments required to replace a given natural resource based on the effect of reproduction. There are current and long-term assessments within an absolute economic assessment framework. The first one is the annual reproduction effect; the second is their sum over the period the natural resource was in economic circulation.
Such an assessment is calculated according to a formula including the difference in the cost of products obtained from natural resource management, before and after their usage, and with the cost of capital investments, as well as the number of capital investments in the assessed year.
A comparative economic assessment is necessary to determine the effectiveness of various measures aimed at a complete use of natural resources, increasing their productivity and quality, the efficiency of exploiting the resources of various regions, etc., as well as measures to preserve and increase the environmental protection role of ecological systems.
Opportunity cost concept
This concept is one of the fundamental ones in economic theory. It allows valuing natural gas assets and other resources that have a low market price or do not have it at all, including lost revenues and benefits that could be obtained if these resources were used for other purposes. Opportunity costs also include benefits that could be obtained from alternative uses (agricultural development, intensive forestry, etc.).
The opportunity cost concept is, to some extent, related to the cost concept. The lower the opportunity cost of natural resources, the fewer costs are needed to compensate for the economic losses from the conservation of this good. In practice, this approach is used to measure the “value of conservation.”
Also, the concept of shared economic value looks promising. According to it, the total monetary value is the sum of four indicators:
Total economic value of a natural resource = (use value + non-use cost) = (direct use cost + possible use cost + indirect cost + subsistence cost).
The cost of use is easiest to estimate from an economic point of view. For example, forests’ direct use value consists of sustainable timber harvesting, medicinal plants, by-products, tourism, and sustainable hunting and fishing.
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All these indicators are quite tangible and have their price. Summing them up gives a direct cost.
How can tokenization help with natural resource valuation?
All approaches to valuing natural gas assets and other resources mentioned above carry a lot of uncertainties. They cannot take all the nuances into account, including which market to take as a reference, how to take into account current and futures prices, which are constantly evolving, and environmental issues. The market approach is a much more appropriate way to give real value to a particular natural resource, aggregating all the factors. When thousands of investors are interested in investing in natural resources, the value of such assets self-regulates based on the principles of supply and demand. However, how do you create such a market for such an asset type as natural resources? Tokenization is the easiest and most profitable way.
By tokenizing natural resources, you make it easier for retail investors to access the market and get the objective value of resources following market sentiment. The process of tokenizing natural capital assets is carried out much faster and cheaper than an IPO. The result is the availability of natural assets tokens tied to a processing enterprise or the resources themselves for investors worldwide.
In addition, the issuance of natural assets tokens corresponds to the concept of impact investments. This is a growing trend aimed at investing in projects related to the preservation of the environment and social processes. Impact investing implies that investors are willing to pay in excess or receive low risk-adjusted returns for the features of natural resources. First of all, such investments are concentrated in developing countries.
According to the Global Impact Investor Network investor survey, the impact investment market is growing by about 18% per year and will exceed $1 trillion in assets under management in 2022. According to the latest estimates, conservation projects need $300–400 billion a year but receive only $52 billion, mostly from government and philanthropic foundations. Tokenizing natural capital assets is an effective way for them to raise vital funds to continue their activities.
The assessment of natural resources is necessary in order to attract investments, as well as continue work on environmental projects. However, none of the classical assessment methods gives a complete picture since many factors must be taken into account, not all of which have a quantitative display. Tokenization is a simple and effective way to value natural resources based on an open market. Any business engaged in processing natural resources or the owner of a forest, agricultural land, a mine, and so on can issue natural assets tokens and receive investments for further development.
If you are interested in tokenizing natural capital assets, Stobox experts will be happy to provide you with an initial free consultation. We have extensive experience in this niche and accompany our clients at every stage, saving them significant amounts of money and time.