Developing markets for ecosystem services from peatlands

Nick Hanley

Professor of Environmental Economics

University of Stirling

'Investing in Peatlands - Delivering Multiple Benefits' Conference

Or:

Can economics “save” peatlands?

Declines in peatlands globally

• Often the result of market forces• Example: palm oil demand and peat swamp forest loss in SE

Asia• Overall rate of loss about 60% (Miettinen et al, 2011)• Private benefits (value of conversion) drive this, but many

of the social and environmental costs of land conversion do not get taken into account in land use management

• This will only change when either ecosystem markets and/or government policy bring about a financial reward for the environmental and social benefits (eg biodiversity values, avoided GHG emissions) of peatland conservation and restoration.

UK National Ecosystems Assessment (for MMH):• Last 100 years: decline in quality and area of peatlands in UK• Main drivers: grazing pressures, forestry, housing/roads (lowland

heath), air pollution (SO2 and N deposition), burning.• increased levels of peat erosion, loss of structural diversity,

decreases in species richness and an expansion of grasses at the expense of moss and dwarf shrub-dominated communities.

• Again, loss/deterioration is the result of market forces sending the wrong signals to land owners and land managers (lack of financial return for economic benefits of peatland conservation and restoration)

• and due to un-priced externalities elsewhere in the economy impacting on peatland loss (eg air pollution from industrial activity and transport)

For the UK..

Whether in the UK or Indonesia or Eastern Europe….

Reversing this trend of loss requires:

• Rewarding landowners for more of the benefits of peatland conservation

• Correcting market failures elsewhere in the economy which have negative impacts on peatland quality

• Recognising the multiple benefits that peatlandscan deliver in land-use planning and in policy design. (UK NEA)

How can economics help here?

1. making the case for conservation

2. Design of more cost-effective policies for conservation

3. Development of markets for ecosystem services

None of this guarantees a better future for peatlands. But it does make a better future more likely.

1.MAKING THE CASE FOR CONSERVATION

Making the case for conservation

• Now much more widely recognised that conservation generates economic benefits, even if these do not show up as market values

• Idea of Cost-Benefit Analysis

• Compare benefits of conservation with opportunity costs over a given time period

• Focus on changes in ecosystem service flows over time

Economic values for peatlands

• Main problem – a lot of the benefits of protecting peatlands are not priced by markets, and so do not show up in financial returns

• Outdoor recreation, biodiversity, scenic values

• People may get utility from habitat protection even if they never visit the area

• Development of a suite of methods for estimating the monetary equivalent of these values, based on the standard economic concept of value – willingness to pay measured using both revealed and stated preferences

• Again, focus on marginal changes in value flows – not on total values.

Values for ecosystem services

• Post Millennium Ecosystem Assessment, discussions of economic values of protecting habitats increasingly put in terms of values of ecosystem services

• Ecosystem services provide direct or indirect benefits to people

• Examples: flood mitigation, water quality maintenance, air pollution filtering, recreation, carbon storage

• Mix of market- and non-market values

Ecosystem services of peatlands in UK NEA

• Livestock Products• Game• Peat extraction – being phased out in UK• Drinking Water and Pollution Treatment• Natural Hazard Mitigation• Biodiversity • Landscape values (cultural heritage) • Carbon• RecreationWe were not able to put ££ values on all of these –

science and economic evidence base is too limited

Examples of how values generated for peatlands

• Value of walking

travel cost models

• Value of biodiversity and landscape

contingent valuation and choice experiments

• Value of carbon sequestration and water

quality maintenance avoided costs

• Value of grouse hunting market prices

• Likely importance of non-use values for

unique areas subject to irreversible threats

contingent valuation.

• Currently working on economic benefits (and costs) from changes to landscape and birds from less intensive grouse moor management.

• We have also produced benefit estimates for alternative ways of conserving hen harriers and golden eagles on moorland on managed shooting estates

(Hanley et al, Ecological Economics, 2010)

Comparing costs and benefits of peatlandsprotection

• Economic framework of Cost-Benefit Analysis

• Protecting habitats has many benefits: for example, recreation values, biodiversity values, scenic values

• We can now estimate what these are “worth” in ££s

• If development occurs, then these benefits might be lost for ever “irreversibilities” (Arrow and Fisher, 1974)

© SNH

Costs of preservation

• But protecting peatlands also has costs – in particular, opportunity costs

• These are the benefits that we forego by NOT “developing” an area.

• e.g. forestry, quarrying, wind farms, more intensive grouse management….

• Society incurs the costs of foregone incomes from development in deciding to protect areas

• In cost benefit analysis, we compare these costs with the benefits of wilderness protection, and ask which management option gives the biggest net benefit (= benefit – cost)

An example

• 1970-1990: afforestation is increasing in the Flow Country, encouraged by tax incentives

• Flow Country: – One of Scotland’s outstanding

ecosystems– 184,000 ha. of core blanket bog

• Viewed as important :– For its flora – As a large example of a hydrologically-– linked complex system – For its visual quality, – For waders such as greenshank and

dunlin

• Paleo-ecological evidence suggests tree cover was always rather limited

© SNH

© Highlandwildcat.com

• Technological advances and tax concessions

resulted in planting by private forestry

companies using non-native conifers, although

most land in wind-throw categories 5 and 6

• This was thought by conservationists to damage the status of the Flow Country:– due to effects of drainage

– effects on birds

– impacts on water quality

• Hanley and Craig (Ecological Economics, 1991) undertake a cost-benefit analysis of afforestation, comparing benefits of preservation with benefits of development

© scienceblitz.com

© RSPB

• Pt – benefits of protection. Estimated using contingent valuation. Gave aggregate value of £3.9 million per year, for the Scottish population

• Dt – benefits of development. Estimated using projected real timber prices for 40 year rotation and a land price of £400/ha.. Excluding grants and tax credits, this gave a negative net present value for planting

• Taking account of protection benefits makes this even more negative clear economic conclusion is that planting was not efficient for society

• And that subsidising planting in this instance could not be justified on economic efficiency grounds

• However, CBA of habitat protection does NOT always come up with the “right” answer for conservation….lowland heaths

Another example: Costs and benefits of renewable energy schemes• Some types of renewable energy investments could have big

impacts on peatlands,

e.g. Hydro, wind

• Balanced against other environmental aspects, and effects on electricity prices

• Evidence from “choice experiment”: Bergmann et al., 2006.

Sample = Scottish public.

© Sundancerrenewables

option example

Plan A Plan B Neither

LANDSCAPE visual impact caused by

location and/or size HIGH NONE No increase in

renewable energy

Alternative

climate change

programs used

WILDLIFE health of habitat SLIGHT HARM SLIGHT HARM

AIR POLLUTION NONE NONE

EMPLOYMENT new jobs in local community 8-12 JOBS 1-3 JOBS

North Sea gas

fired power

stations instead

£

PRICE OF

ELECTRICITY

additional rates per year

£16

per year £7

per year

YOUR CHOICE: (please tick one only)

A B I would not want

either A or B

Choice experiment sample card

Scenario: Base Case A B C D

Fossil Fuel power station expansion

Large Offshore Wind farm

Large Onshore Wind farm

Small Onshore Wind farm

BiomassPower Plant

Attribute Levels:

Landscape impacts

Low None High Moderate Moderate

Wildlife impacts

None None None None Improve

Air Pollution Increase None None None Increase

Employment –no. of new jobs

+2 +5 +4 +1 +70

Welfare Change (£/hsld/yr.):

+£6.60 -£19.40 +£2.40 +£4.60

Welfare Change for Alternative Energy Projects

• Such analysis can show that renewable energy investments that seem best on financial grounds are not preferred on social cost-benefit analysis criteria.

• Implies government should re-align incentives to get this recognised in private sector decisions; or take environmental costs and benefits into account in granting planning permission.

2. MAKING CONSERVATION MORE COST-EFFECTIVE

2. Making conservation more cost-effective

• Important given limited public budgets for conservation policy (eg agri-environment schemes)

• Goal: Maximising conservation benefits delivered per £ of public spending

• Key feature: costs of conservation actions vary both across landowners (variations in opportunity costs, egas reflected in land prices) and for increasing scale of conservation actions by individual landowners

• whilst the potential of land managers to deliver environmental benefits varies across space in a way which is not known for sure by the regulator

• Offering uniform payments over-rewards/over-compensates all but the “marginal” farmer who takes up the scheme

• Implies much bigger costs for a given “quantity” of conservation actions.

• Our work in the Peak District showed that each £ of public spending on agri-environment schemes over-compensated farmers on average by 50% to 88% for income foregone

• Not un-common finding in literature

How to make schemes more cost-effective?

• Spatial or farm-level targetting in terms of £ per unit of environmental output sounds sensible

• But many of the costs of participation are hidden from government/agencies

• Land prices do not tell all.

• So need a mechanism which (i) reveals this cost information and (ii) results in payments which better reflect true “supply price” of conservation

How to make schemes more cost-effective?

• One approach to this is the conservation auction (Stoneham’s “bush tender”)

• Quite a lot of experience now with such schemes in Australia and US

• But several problems still to be solved: evolution of bids over time; transactions costs; metrics for environmental benefits delivered by individual bids; spatial coordination

We could also improve the cost-effectiveness of schemes by..

• Recognising spatial variations in supply prices and ecological benefit potential.– Our work in the Peaks also shows that designing

payment rates which vary spatially according to variations in supply price also produce big improvements in efficiency

• Paying for environmental outputs rather than changes in management actions– But this has higher transactions costs, and risks are

shifted onto farmers developments in China for soil conservation programmes.

3. DEVELOPING MARKETS FOR PEATLAND ECOSYSTEM SERVICES

3. Developing markets for peatlandecosystem services

• We have already noted that many of the ecosystem services provided by peatlands do not have a market (financial value)

• Water quality maintenance; carbon storage and sequestration; recreation; biodiversity

• This means that land owners and managers face the “wrong set of price signals” from the viewpoint of social well-being, since they do not get rewarded by the market for producing these services

• Eg no pay-off from storing carbon, or for beautiful landscapes, or for inputs to water quality.

What makes a market for ecosystem services?

• Main problem: what is being supplied is often non-excludable and non-rival in consumption

• Means private market under-supplies

What makes a market for ecosystem services?

Either:

• Government creates a market for example by setting constraints on land management or land conversion wetland banking and offsets in US. Some interest in Commission and in UK White Paper.

• Government acts as the buyer on society’s behalf (agri-environment schemes)

• Buyers become able to “capture” more of the benefits of ecosystem services supplied by the actions of others eg eco-labelling schemes for palm oil.

“Buyers are able to capture more of the benefits of

ecosystem service”

• Eg water company able to directly benefit from less polluted water supplied (Yorkshire water, UU?)

• Eg transport company able to offset emissions of CO2 by paying for wetland restoration

• Eg more general markets in carbon stored in/sequestered by peatlands

(for more on all the above, listen to Mark Reed’s talk)

• Eg conservation organisations act on behalf of members to buy biodiversity improvements (eg RSPB) or buying “wilderness quality” (eg John Muir Trust)

Issue of who benefits and who provides

• Spatially differences with implications for what kinds of ecosystem market might emerge, and how payment flows are directed

• Fisher et al, 2009, Ecol.Econ.

Spatial relationships between buyers and sellers

Type 1: ??

Type 2: recreation

Type 3: water quality

Type 4: mangroves/coastal fisheries (eg in Thailand); storm protection.

• But markets for ecosystem services, eg for carbon, could also offer incentives to degradepeatlands eg by tree planting, depending on carbon productivity of different land uses.

• May well be trade-offs between supply of some ecosystem services.

So economics can help conserve peatlands.

• Making the case for conservation

• Design of more cost-effective conservation policies

• Development of markets for ecosystem services

• Other arguments could also be made eg value of information about past landscapes stored in peatlands; value of measuring ecosystem resilience to previous shocks.

More information

Hanley N and Barbier E (2009) Pricing Nature. Edward Elgar Publishing.

www.management.stir.ac.uk/about-us/economics

n.d.hanley@stir.ac.uk

Thanks to Aletta Bonn and Mark Read.