Ecosystem Service Valuation

Environmental Economics Fall 2013Maggie Winslow, Ph.D.

What are Ecosystem Services?• Benefits people obtain from ecosystems

DIRECT USE VALUES INDIRECT USE VALUES NON-USE VALUES

Provisioning Regulating/Support Cultural

Crops/ Livestock Maintenance of air quality Existence value, Bequest value

Animal skins Regional/ local/ global climate regulation Ethical and spiritual values

Capture fisheries/ Aquaculture

Water purification and waste treatment

Educational and inspirational values

Freshwater Regulation of water timing and flows

Timber and other wood fibers/ Biomass

Erosion control and sediment retention

Biochemicals, natural medicines, and pharmaceuticals / Genetic Resources

Natural hazard mitigation /Flood control

Ornamental resources Disease mitigation

Cultural Maintenance of soil quality

Recreation and ecotourism Pest mitigation / Pollination

Categorization of Ecosystem Services

Classifying Ecosystem Services – Some Fit Multiple Categories

Stillwater Sciences. 2011. Overview of ecosystem services quantification tools and proposed format for site tool development. Prepared by Stillwater Sciences, Berkeley, California for Sustainable Conservation, San Francisco, California.

Ecosystem Services Can Have Multiple Functions

http://agbiodiversity.com/AgBiodviersityProject/Howbiodiversitysupportsfarmprofits/tabid/133/Default.aspx

Carson and Mitchell (1993)

WRI Survey: Are Ecosystem Services Being Addressed in Environmental Decision

Making?

A 2010 online survey by WRI of 171 environmental consultants, government employees, NGOs found:

• 79% of respondents knew about ecosystem services

• 40% have seen ecosystem services addressed in environmental assessment– Freshwater is the main service that is addressed

• Main perceived barrier is lack of guidance on how to address ecosystem services

Importance of ES for Decision Makers

• Ecosystems are being degraded at a high rate – climate change exacerbating this.

• Demand for ecosystem services is increasing– Population growth – Improved in living standards

• ES are growing scarcer

• What gets measured gets managed - Our policy decisions often do not incorporate the value of ecosystem services

• Ecosystem Service Valuation (ESV)

Multiple Purposes for ESV in Relation to Policy Making

Monitor changes in natural capital and the impact of this on human welfare ex. Natural Capital Accounting

Natural Resource Damage Assessment

Evaluation of proposed policies/developments

Cost-Benefit Analysis

Cost-Effectiveness

Analysis

Multi-criteria Analysis

Cost-Benefit, or Benefit-Cost, Analysis

Given that a policy will require some inputs and produce some outputs, it will also have costs and create benefits. Comparing the costs and benefits in monetary terms is what benefit-cost analysis amounts to.

Benefit-cost analysis can help determine which policy/program/project is more efficient than the other, or alternatively which one is more cost-effective.

Example of ESV and CBA

• UK Cost Benefit Analysis of proposed marine reserves– 11 relevant ecosystem services identified – 7 were valued due to available information – Benefit transfer method

• NPV of benefits range – US$16.4 to $36.1 billion

• NPV of costs range – US$0.6 and $1.9 billion

• Benefit to cost ratio is ~10:1, not all benefits even included

Hussain et al., 2010

Cost-Effectiveness Analysis

• Goal is already determined. Analysis is used to find the least expensive means to achieve this goal.

Cost Effectiveness Analysis Example: A Watershed Approach to Improve Water Quality: Case Study of Clean Water

Services’ Tualatin River Program, Clean Water Services (CWS), Portland OR’s public water resources utility.

Faced with the need to lower effluent water temperatures in order to maintain its permits to discharge water into the Tualatin River, CWS considered two alternatives:

1. Build a new facility - $60 million, annual operating costs of $2 million

Benefit: it does the job, no environmental benefits were identified

2. Ecosystem Restoration and Maintenance - $5 million

Benefit – it does the job, it saved money, 1.6 mil trees/shrubs planted resulting in thermal credits of 295 mil kilocalories per day, restored salmon habitat, upland scrub habitat, carbon sequestration, increased biodiversity, recreation opportunities.

Multi-Criteria Analysis

• Monetary information is used as one input in the decision making process.

Historic U.S. Federal Use of ESV

Comprehensive Environmental Responses, Compensation and Liability Act (CERCLA) (Superfund): 1980 – allowed for ecosystem damage assessment.

Executive Order 12911 (1981) required cost benefit analysis be applied to new regulations

1991 EPA convened an Ecosystem Valuation Forum- focused on how to improve linkages between ecology and economics

ESV used by USFS, mostly in CBA related to forest planning and water resources

Federal Level Progress in ESV• EPA’s National Center for Environmental Economics (NCEE),

established 2000.

• Government sponsored $4.5 million tools competition

• USDA’s Office of Environmental Markets, which as of January 1, 2011 is part of the Office of the Chief Economist.

• Guidelines for Preparing Economic Analyses published by the NCEE in 2011

PCAST Report 2011SUSTAINING ENVIRONMENTAL CAPITAL: PROTECTING SOCIETY AND THE ECONOMY

Executive Office of the PresidentPresident’s Council of Advisors on Science and Technology

JULY 2011

PCAST Report: Federal agencies that implement biodiversity and ecosystem conservation programs should prioritize expenditures based on cost efficiency. • Federal agencies collectively currently

spend more than $10 billion annually on ecosystem restoration activities.

• Much more careful targeting could achieve greater environmental benefits at the same cost.

PCAST: Federal agencies with responsibilities relating to ecosystems and their services (e.g., EPA, NOAA, DOI, USDA) should be tasked with improving their capabilities to – develop valuations for the ecosystem services affected by

their decision-making and – factor the results into analyses that inform their major

planning and management decisions.

• The Office of Management and Budget (OMB), OSTP, and CEQ should ensure that the methodologies are developed collaboratively across agencies.

Example of Federal Requirement for ESV

• In relation to federal infrastructure investments: “all types of benefits and costs, both market and non-market, should be considered. To the extent that environmental and other non-market benefits and costs can be quantified, they shall be given the same weight as quantifiable market benefits and costs.”- Executive Order 12893, 1994

California Water Quality Control Board

• Regulate activities in order to: “attain the highest water quality which is reasonable, considering all demands being made and to be made on those waters and the total values involved, beneficial and detrimental, economic and social, tangible and intangible.”

However…

• There has been little enforcement of these requirement to consider broader valuation of ecosystem services.

International ESV Initiatives– TEEB: The Economics of Ecosystems and

Biodiversity series – UNEP, European Commission

– WAVES: Wealth Accounting and Valuation of Ecosystem Services – World Bank, UN, many national governments and NGO

– The Millennium Assessment, UNEP: ~2000 experts, 4 year project to survey the world’s ecosystems’ health

Private:– Companies calculating the value of their impacts

on ES – ex. Puma

Puma Environmental P&L Statement 2010

• € 94 million of GHG emissions and water consumption • € 51 million caused by land use change for the production of raw materials, air

pollution and waste along its value chain.

Only € 8 million of the € 145 million total derive from PUMA’s core operations such as offices, warehouses, stores and logistics while the remaining € 137 million fall upon PUMA’s supply chain.

These costs, which will not affect PUMA’s net earnings, will serve as an initial metric for the company when aiming to mitigate the footprint of PUMA’s operations and all supply chain levels.

http://safe.puma.com/us/en/2011/11/puma-completes-first-environmental-profit-and-loss-account-

which-values-impacts-at-e-145-million/

Local/Regional Policy-related Drivers of Interest in ESV

(Scarlett & Boyd, 2011)

Revenue streams to support conservation,

restoration and sustainable practices

Savings for basic community services such as clean water, protection from floods and fires, erosion and storm water control, etc.

Opportunities for cost-effective regulatory compliance Avoidance or

elimination of costs associated with the loss of ecosystems and their services

Enhancement of the resiliency of communities in a changing world

Multi-Step Process in Ecosystem Service Valuation Related to Policy

Changes

Economic Value of Changes

Impact on Human Welfare

Changes in Ecosystem Services

Ecosystem Impacts

Policy Change

An introductory guide to valuing ecosystem services, DEFRA, 2007

Methods for Assigning Monetary Value to Ecosystem Services

Revealed-preference Stated-preference Cost-based Market methods: Valuations are directly obtained from what people must be willing to pay for the service or good.

Contingent valuation: People are directly asked their willingness to pay or accept compensation for some change in ecological service.

Replacement costs: The loss of a natural system service is evaluated in terms of what it would cost to replace that service.

Production approaches: Service values are assigned from the impacts of those services on economic out-puts (e.g., increased shrimp yields from increased area of wetlands).

Conjoint analysis: People are asked to choose or rank different service scenarios or ecological conditions that differ in the mix of those conditions. Also called “choice experiments”.

Avoidance or Damage costs: A service is valued on the basis of costs avoided, or of the extent to which it allows the avoidance of costly averting behaviors, including mitigation.

Travel cost: Valuations of site-based amenities are implied by the costs people incur to enjoy them

Hedonic methods: The value of a service is implied by what people will be willing to pay for the service through purchases in related markets, such as housing markets. (from Farber et al. 2006, pg. 120)

Revealed Preference Methods Example: Water Quality Violations and Avoidance Behavior: Evidence from Bottled Water Consumption (Zivin et al. 2011)

• Looked at bottled water purchases in locations that experienced water quality violations.

• They find a 22% increase in bottled water sales from a microorganism violation, a 26% increase in response to nitrate violations, and a 17% increase from an element/chemical violation.

• Get an estimate of about $60 million a year of avoidance behavior in the U.S.

Hedonic Pricing Method Example

• Author(s): Boxall, P. C., W. H. Chan and M. L. McMillan

• Title: "The Impact of Oil and Natural Gas Facilities On Rural Residential Property Values: A Spatial Hedonic Analysis"

• Source of Study: Resource and Energy Economics, 2005-01-01

• Web Link: http://www.sciencedirect.com/science/article/B6VFJ-4FK42HM-1/2/02a35e67e71d3242e00100177f37becc

Summary Boxall et al. 2005

• This study estimated the effect of oil and gas facilities on rural residential properties near Calgary, Alberta.

• Data were gathered using real estate listing database for the period January 1994 to March 2001.

• The average reduction in price levels associated with industry characteristics ranged from (CDN 2001) $ 3,487 - $ 20,942.

• The estimated reduction in property value ranged from 4 to 8 percent if property was located within 4 km of industry facilities.

• This study has helped aid the decision making process in siting of oil and gas facilities and provided merits for compensation in lost property value.

CV Example – Carson and Mitchell (1993)

Benefits or Value Transfer

Use the ecosystem service values from one or a series of studies to estimate the values in a similar area or situation.

Ex. Measuring Natural Capital: The Value of New Jersey’s Ecosystem

Services and Natural Capital, 2006Using the benefits transfer approach:

• Wetlands – $9.4 billion/yr (2004 dollars) for freshwater wetlands and $1.2 billion/yr for saltwater wetlands

• Marine ecosystems – $5.3 billion/yr for estuaries and tidal bays and about $389 million/yr for other coastal waters, excluding the value of fish and shellfish

• Forests cover – $2.2 billion/yr, excluding the value of timber

• Urban green space covers – estimated $419 million of ecosystem services annually, principally aesthetic and recreational amenities.

The total value of these ecosystem services is $19.4 billion/year.

Gund Institute, 2006

Ex. Ecosystem service value in dollars per acre per year

Databases for Benefit Transfer

• EVRI: Environmental Valuation Reference Inventory (Environment Canada with support from USEPA and DEFRA)– Searchable database of

~2400 studies with summaries included.

• EarthEconomics, non-profit, Tacoma WA– Researches Library

EVRI Studies

Current Web-based Tools• InVEST: Integrated Valuation of Environmental Services and

Tradeoffs

• ARIES: Artificial Intelligence for Ecosystem Services

Current Web-based Tools Cont. • EarthEconomics:– ESV: Ecosystem Valuation Toolkit– SERVES: Simple and Effective Resource for Valuing

Ecosystem Services

• Others – regionally focused or – cover just one or two ecosystem services

• Consulting firms have proprietary tools – ex. EcoMetrix, EcoAim, ESValue

Present Situation

• More tools under development

• Existing tools – Not compatible – Use different metrics – Use different valuation techniques and philosophies

• EPA and other agencies are developing guidelines for ESV

• Some services receive little attention

Policy Debate Over Using ESV

• Practical: Is some number better than no number? How to deal with uncertainty?– How much accuracy is needed?– ESV helps inform decisions but does not

make decisions.

• Philosophical: Don’t ecosystems have untold value? – But will these be included if no number is

attached?

Obstacles and Limitations

• Provisioning and flow of ES cut across policy-relevant boundaries

• Challenging to conduct ES research that is applicable in policy contexts. – Requires integration of multiple disciplines– Methodology issues can affect credibility of valuation

estimates

• CBA is sometimes precluded by legislative standards

• Lack of consensus on goals of environmental regulations

Final Thoughts

Ecosystem services are increasingly important • Due to climate change – more floods, ocean surges,

drought• Due to fresh water depletion• Ecosystems being depleted/destroyed• Population growth

Ecosystem service valuation is a decision support tool.

Mistake to think that ESV tools are just about quantifying and producing numbers. There is a lot of strategy, framing, training, tactics that must happen to support the numbers.

Can be useful even if it does not cover all relevant ecosystem services.

Primary ReferencesBagstad, K.J., Semmens, D., Winthrop, R., Jaworski, D., and Larson, J. (2012). Ecosystem Services Valuation to

Support Decisionmaking on Public Lands — A Case Study of the San Pedro River Watershed , Arizona Scientific Investigations Report 2012 − 5251. Arizona.

Barbier, E. B. (2011b). Challenges in valuing ecosystem services. World Forum 2011.

Carson, R. T., & Mitchell, R. C. (1993). The Value of Clean Water; The Public’s Willingness to Pay for Boatable, Fishable, and Swimmable Quality Water. Water Resources Research, 29(7), 2445–2454.

Daily, G. C., Polasky, S., Goldstein, J., Kareiva, P. M., Mooney, H. a, Pejchar, L., Ricketts, T. H., et al. (2009). Ecosystem services in decision making: time to deliver. Frontiers in Ecology and the Environment, 7(1), 21–28.

Iovanna, R., & Griffiths, C. (2006). Clean water, ecological benefits, and benefits transfer: A work in progress at the U.S. EPA. Ecological Economics, 60(2), 473–482. doi:10.1016/j.ecolecon.2006.06.012

Liu, S., Costanza, R., Farber, S., & Troy, A. (2010). Valuing ecosystem services: theory, practice, and the need for a transdisciplinary synthesis. Annals of the New York Academy of Sciences, 1185, 54–78.

Scarlett, L., & Boyd, J. (2011). Ecosystem Services : Capabilities, (March).

Tallis, H., & Polasky, S. (2009). Mapping and valuing ecosystem services as an approach for conservation and natural-resource management. Annals of the New York Academy of Sciences, 1162, 265–83.