The potentials and limits of economic quantifications

Carolin Barz

cbarz@ecology.uni-kiel.de

 

Economic valuation involves the assignment of money values to stocks of environmental assets and to changes in environmental services and functions (Pearce, Seccombe-Hett, 2000). It provides monetary indication of the value of ecosystem goods and services.

 

The economic value of an ecosystem good or service relates to its utility and the contribution it makes to human welfare. Things have value insofar as they contribute towards meeting the needs and satisfying pleasure of individuals.

 

Economic valuation is about individual preferences and choices. People express their preferences through the choices and trade-offs they make under certain constraints such as income and time. The economic value is measured by the most someone is willing to give up in other goods and services in order to obtain a good, service or particular state of the world. As preferences change over time under the influence of education, advertising, cultural changes and changes in the abundance of goods and services, choices that individuals make will change accordingly (Farber et al., 2002).

 

Valuation schemes make assumptions about the state of the system and its behaviour when disturbed. Valuing environmental changes is based on people’s preferences for changes in the state of their environment, including small changes in the availability of goods and services or larger changes including the complete absence or presence of some goods and services. Economic valuation determines the ‘difference’ something makes to well-being. Environmental gains and losses are defined in terms of increments or decrements of human well-being. The concept allows evaluating well-defined changes to ecosystems and environmental impacts to be compared (Bockstael et al., 2000).

 

Where markets for environmental goods are in place economic valuation is widely accepted, however the concept has also been extended to ecosystem goods and services which have no obvious market or no market at all since they are mainly not private but public goods and therefore do not qualify for market trading. As they are public goods no one person has the incentive to pay to maintain them and as they have no clearly defined property rights the resources are often overused. Non-market valuation methods which assess economic values indirectly have evolved in the 1960/70s in the U.S. (Navrud, Pruckner, 1997). In limited cases, markets for environmental services have been created (i.e. emissions trading schemes).

 

When goods and services are directly tradable in normal markets, their exchange value (trading ratio) is their market price. However, market prices reflect values of goods and services only on the margin. Also, markets do not reflect the full social cost or benefits of goods and services.

 

Non-market valuation methods include revealed and stated preference methods. Revealed preference methods include Travel Cost and Hedonic Pricing. Preferences are conveyed from the behaviour of an individual making choices about some good or option not explicitly connected to the attribute being valued. They are based on actual rather than intended behaviour. Stated preference methods include Contingent Valuation and Choice Modelling. They are based on the society’s willingness to pay for a good or service and to avoid a loss or its willingness to accept compensation to tolerate a loss or forego a benefit. These techniques involve a direct questionnaire approach which allows people to express their preferences for or against environmental changes. Only stated preference methods are able to measure Total Economic Value of environmental goods and services, including use and non-use values (Navrud, Pruckner, 1997). Use values derive from the use of the resource, non-use values reflect values unrelated to their use. Total values are indeterminate, whereas marginal values are finite.

 

Traditionally, economic valuation establishes individual-based values which are then aggregated to represent a socially-relevant unit, from the community to the entire planet. However, this technique is only appropriate when goods and services are private and do not involve externalities or when public goods and services are enjoyed individual-based without externality impacts (Farber et al., 2002).

 

Table 1: Valuation techniques (after Farber et al., 2002)

 

 

Each of these methods has its strengths and weaknesses. Also, each good and service has an appropriate set of valuation techniques.

 

Economic valuation is a fervently disputed topic. Some argue for its use, others rally against it. Economic valuation has its potentials, but also several shortcomings.

 

Economic argumentation concerning ecosystem goods and services is used in the hope to provoke policy resonance and encourage conservation. Economic arguments underline nature’s importance for human well-being and can give signals to guide human use of ecosystems. It gives incentives to conserve nature if economic benefits exceed those from habitat conversion. Therefore economic valuation can provide a compelling case for nature conservation (Balmford et al., 2002). It may be a useful tool by providing a way to justify and set priorities for programs, policies or actions that protect or restore ecosystems and their services. It allows for a comparison of alternative options and can guide policy decisions regarding the natural environment. Also, economic valuation shows the social cost of environmental degradation. Using valuation techniques damages can be assessed and costs for protection and restoration can be calculated. It is claimed that economic valuation provides information on the relative scarcity and qualitative condition of the natural environment (Howarth, Farber, 2002).

 

However, economic valuation of ecosystem goods and services has been criticised for its weaknesses.

 

Economic valuation is an anthropocentric concept. It refers to a subjective human perception of the environment rather than being an objective method of evaluation. Values are placed on ecosystem goods and services because they satisfy human wants and needs. Economic valuation addresses the economically relevant parts and declares the rest to be superfluous (Spangenberg, 2008). It is criticised that it treats the environment as a commodity. Many people believe that some environmental assets are priceless and consider it immoral to place a value on goods such as clean air or clean water or cultural values. It is widely believed that the ecological system is rather invaluable as it is essential for human survival.

 

Furthermore, the understanding about the physical world is limited. Ecosystems are dynamic, complex, non-linear systems. There is a lack of knowledge how ecosystems function and how humans alter ecosystems. We are not able to predict the magnitude and direction of changes. Also, ecosystem functioning is not given enough emphasis in economic valuation and it is misleading to focus on single functions or to consider and value ecosystem services in isolation from one another as it is commonly done (Toman, 1998).

 

Usually the focus is on immediate, on-site benefits and values represent a snapshot of the ecosystem. Long-term development of ecosystems and indirect impacts are often ignored. Most values are also derived when ecosystems are functioning normally. A study by Turner et al. (2003) shows that very few studies track site changes in values across different states of ecological disturbance. It is argued that economic valuation is not a suitable scarcity indicator.

Uncertainties about ecosystem functioning and changes, as well as flawed values have negative implications for management and give false policy directives. Its usefulness to provide the information necessary to set policy priorities is also put into jeopardy (Spangenberg, 2008).

 

There is also widespread concern about the methodology of economic valuation. It is argued that the choice of measurement methodology tends to influence the outcome more than the object under study (Spangenberg, 2008).

Values are based on individual preferences, however many goods and services are of public nature. It is assumed that often people act out of self-interest (Kumar, 2005). Also, preferences toward ecosystems’ services may be vague or poorly formed and likely to change over time and with new information acquired (Limburg et al., 2002). Anything that preferences fail to take into account is ignored from further consideration and moreover system limits are totally neglected (Spangenberg, 2008).

 

There are also drawbacks related to the combination of different methods, double-counting, the lack and reliability of data, chosen units, aggregation etc. Costanza et al. (1997) estimated the value of the natural capital using case studies to derive average values per hectare for each of 17 services across 16 biomes. Extrapolating to the globe by multiplying by each biome's area, the aggregated annual value of ecosystem services (updated to 2000 US$) are estimated to lie in the range of $18 trillion to $61 trillion, around a rough average of ~$38 trillion. Bockstael et al. (2000) criticise that the analysis is seriously flawed. “It is incorrect to extrapolate the value estimates obtained in any of these studies to a much larger scale, let alone to suppose that the extrapolated estimates could then be added together and applied to the whole planet” (Bockstael et al., 2000).

 

Besides, as the true value of ecosystem goods and services cannot be translated into monetary terms only marginal values are used, however this can lead to the severe underestimation of nature (Bockstael et al., 2000).

 

As noted above, it is important to select the appropriate method for valuation for each specific case. However, as economic valuation has it limits interdisciplinary approaches are needed. Monetary and non-monetary indicators should complement each other. Indicators should be developed which are able to specify the state of an ecosystem, how it is affected and changing. Ecological monitoring and research must assist evaluation procedures (Toman, 1997). Also, instead of utility goals, efficiency, sustainability and equity implications should be incorporated (Limburg et al., 2002). Also, preferences and choices should be better understood. To overcome the problems associated with individually based preferences the concept of small group deliberation has been developed. It is argued that open public debate can derive consensus values which reflect true social values for ecosystem goods and services (Wilson, Howarth, 2002).

 

Spangenberg (2008) suggests a system based on the prism of sustainability approach encompassing the economic, institutional, social and environmental dimension. Instead of a value based decision it allows for policy based balancing capturing the full spectrum of sustainable options. The prism serves to indicate the cost aspects of each option in combination with the not monetised ecological and social aspects and instead of providing an undisputable best solution rather defines a ‘corridor of sustainable solutions’. This approach goes together with a hierarchical system of analysing the main pressures and drivers which can be used to define policy priorities.

 

Another popular approach are Payments for ecosystem (environmental) services (PES). It follows the beneficiary-pays approach where the beneficiary (consumer) of services pays back the provider of these services. Wunder (2005) defines it as a “voluntary transaction where a well-defined ecosystem service (or a land-use likely to secure that service) is being ‘bought’ by a (minimum one) ES buyer from a (minimum one) ES provider if and only if the ES provider secures ES provision”. PES can be market-based or government-driven and can be undertaken by private or public bodies. There are many projects worldwide. PES are mainly used in the areas of watershed protection, forest or biodiversity conservation, carbon sequestration and storage and wildlife and landscape conservation in support of tourism.

PES promote the conservation of natural resources as they give incentives to induce behavioural change. They encourage the incorporation of sustainable practices in production, extraction and resource management. They give incentives to restore damaged ecosystems and to sustain the supply of critical resources (Sheng, no date). PES can also help raising conservation funds (Koellner, 2008). They can provide social development opportunities and help alleviate poverty.

 

However, PES have also some limitations concerning technical considerations and policy design (Sheng, no date). There is concern about implementation, monitoring, verification and compliance and free-riding. PES also often involve high transaction costs. There is also concern about the demand for and supply of services. So far, too few service users are so confident about the PES mechanism that they are willing to pay. Also, there is poor knowledge about the dynamics of ecosystem service supply (Wunder, 2005).

 

PES projects may deprive communities of their legitimate land-development aspirations, change local livelihood dynamics, encourage illegal land use or lead to unexpected environmental side effects. PES can have negative impacts on non-participants (i.e. access to natural resources, job losses, changes in labor demand). Often leakage benefits to non-poor participants have occurred (Pagiola et al., 2005).

 

To date, PES have often been low (Wunder, 2005) and often PES projects are met with resistance in developing countries which are concerned about equity considerations and access to natural resources since many small landowners do not hold formal land titles (Gutman, 2006). In general, there is too little known and hands-on experience is needed (the market is expected to grow in the future).

 

So far, principally small-scale projects have been executed. There is a need to upgrade the scheme to an international level since the global trade of natural resources has major implications for the management of ecosystem services (Koellner, 2008). The carbon market is the most developed form of PES operating at the international level (Clean Development Mechanism (CDM) under the United Nations Framework Convention on Climate Change).

International Payments for Ecosystem Services (IPES) can include on-site compensation offset payments and payments for services, allowing negative and positive externalities to be taken into account. IPES should be designed to overcome incentives for free-riding, to ensure permanence of funding and service provision under changing external conditions. There is a need to include land import and export data into land use and ecosystem accounts and link accounting on an international basis (Koellner, 2008).

 

References

 

Balmford, A., Bruner, A., Cooper, P., Costanza, R., Farber, S., Green, R. E., Jenkins, M., Jefferiss, P., Jessamy, V., Madden, J., Munro, K., Myers, N., Naeem, S., Paavola, J., Rayment, M., Rosendo, S., Roughgarden, J., Trumper, K., Turner, R. K. (2002) ‘Economic Reasons for Conserving Wild Nature’, Science, 297 (5583): 950 – 953.

 

Bockstael, N. E., Freeman, A. M., Kopp, R. J., Portney, P. R., Smith, V. K. (2000) ‘On Measuring Economic Values for Nature’, Environ. Sci. Technol., 34: 1384 – 1389.

 

Costanza, R., d'Arge, R., de Groot, R., Farber, S., Grasso, M., Hannon, B., Limburg, K., Naeem, S., O'Neill, R. V., Paruelo, J., Raskin, R. G., Sutton, P.,van den Belt, M. (1998) ‘The value of the world's ecosystem services and natural capital’, Ecological Economics, 25 (1): 3 – 15.

 

Farber, S. C., Costanza, R., Wilson, M. A. (2002) ‘Economic and ecological concepts for valuing ecosystem services’, Ecological Economics, 41: 375 – 392.

 

Gutman, P. (2006) PES: A WWF Perspective.

 

Howarth, R. B., Farber, S. (2002) ‘Accounting for the value of ecosystem services’, Ecological Economics, 41: 421 – 429.

 

Koellner, T. (2008) International Payments for Ecosystem Services (IPES). Workshop on Ecosystem Services, Salzau / Germany May 2008 (Session C).

 

Kumar, P. (2005) Market for Ecosystem Services.

 

Limburg, K. E., O’Neill, R. V., Costanza, R., Farber, S. (2002) ‘Complex systems and valuation’, Ecological Economics, 41: 409 – 420.

 

Navrud, S., Pruckner, G. J. (1997) ‘Environmental Valuation – To Use or Not to Use?’, Environmental and Resource Economics, 10: 1 – 26.

 

Pagiola, S., Arcenas, A., Platais, G. (2005) ‘Can Payments for Environmental Services Help Reduce Poverty? An Exploration of the Issues and the Evidence to Date from Latin America’, World Development, 33 (2): 237 – 253.

 

Pearce, D. W., Seccombe-Hett, T. (2000) ‘Economic Valuation and Environmental Decision-Making in Europe’, Environ. Sci. Technol., 34: 1419 -1425.

 

Sheng, F. (no date) International Payments for Ecosystem Services

 

Spangenberg, J. H. (2008) Precisely incorrect? Monetising the value of ecosystem services. Workshop on Ecosystem Services, Salzau /Germany May 2008 (Session C).

 

Toman, M. (1998) ‘Why not to calculate the value of the world’s ecosystem services and natural capital’, Ecological Economics, 25: 57 – 60.

 

Turner, R. K., Paavola, J., Cooper, P., Farber, S., Jessamy, V., Georgiou, S. (2003)  Valuing nature: Lessons learned and future research directions.

 

Wilson, M. A., Howarth, R. B. (2002) ‘Discourse-based valuation of ecosystem services: establishing fair outcomes through group deliberation’, Ecological Economics, 41: 431 – 443.

 

Wunder, S. (2005) CIFOR Occasional Paper No. 42 - Payments for environmental services: Some nuts and bolts

 

External links

 

Ecosystem Valuation

Forest Carbon Partnership Facility

Katoomba Group Infrastructure Fund for the Planet

The Katoomba Group’s Ecosystem Marketplace

Clean Development Mechanism (CDM) under the United Nations Framework Convention on Climate Change