Friday, February 1, 2013

Putting a price on nature

Returning to the topic of my first post, ecosystem services are the benefits provided by the environment to humans: food, clean air/water, climate regulation, storm mitigation, etc. The most widely cited study in this field is Costanza et al, which estimated that the value of global ecosystem services was $33 trillion per year (compared to global GNP of $18 trillion per year). Wait, what? $33 trillion?

How do Costanza and others value ecosystem services? Why do we try to value them? And what does this mean in real life? There are plenty of problems with this approach that I'll discuss briefly, but that's a topic for another post.

How do you value an ecosystem service?

Well, there are lots of ways and it depends on the ecosystem service. Food production is relatively easy: the amount of the food sold times its price. Hydroelectricity generated from a reliable water supply is sold on electricity markets. This is the direct market pricing method.

It gets more complicated when you try to value services that are not bought and sold in markets (more on non-market costs/benefits in a later post); there several valuation methods. Example: in the Catskills Mountains in New York, suburbanization and agricultural expansion were affecting water quality - the "Cat-Del" watershed system supplies 90% of New York City's water. Rather than spending an estimated $8 to $10 billion on a water filtration plant that would bring the water up to the Environmental Protection Agency's (EPA) standard, the City paid landowners approximately $1.5 billion to improve land management and reduce water contamination. You can say that the value of water filtration provided by the Cat-Del system was $8 to $10 billion. This is the avoided cost method.

Reefs, mangroves, and other coastal ecosystems protect coastal communities from tsunamis, hurricanes, and other natural disasters. They also reduce erosion. By comparing the historical damages in places with and without such coastal ecosystems, you can estimate the value they provide. WRI estimated that Belize's coastal ecosystems provided the country $231 million to $347 million per year in avoided damages. This is the avoided damages method. 

Other methods, like contingent valuation, estimate values by asking people how much the service is worth to them. There is an ongoing effort to measure the global spiritual value of the Amazon through a global survey. I would argue that measuring the spiritual value of an ecosystem is economists taking valuation too far. I'd rather say that the Amazon has intrinsic spiritual value that is incalculable. But maybe estimating the ecosystem's value will increase its protection....

Why value ecosystem services?

The idea is that by valuing ecosystems, policy makers can make better development/planning/conservation decisions. Pavan Sukhdev has led the TEEB effort to provide policy makers with better decision tools. A great example highlighted in a TEEB report is the decision of development of tropical rainforest in the Leuser National Park in Sumatra, Indonesia. The study models the change in ecosystem services of three scenarios: conservation, selective timber extraction, and deforestation. Included in benefits from forest conservation were: water supply, fisheries, flood/drought prevention, agriculture and plantations, hydro-electricity, tourism, biodiversity, carbon sequestration, forest fire prevention, non-timber forest products and timber. The net present values to the local communities of the three scenarios were: conservation $9.5 billion, selective use $9.1 billion, and deforestation $7 billion. 

It's easier to see the benefits from "development" as there is a market value for those services. If a forest is converted to agricultural use, those products can be sold. The supplier of non-market ecosystem services (whoever owns the forest) is not normally compensated for these services. Valuation attempts to address this market failure.

The approach directly challenges the idea that development and conservation are opposing forces. There are limits to the earth's productive capacity and at some point "development" decreases benefit. 

Recent, real-life example: Kenyan forests

UNEP and the Kenyan government recently published a report suggesting that deforestation of Kenya's "Water Towers" had an overall negative value to the country. The Water Towers are forests that regulate the supply of water to a large part of the country. Between 2000-2010, 50,000 hectares of the Water Towers were deforested. Timber from the forests was sold for about $16 million. However, decline in lost services cost the country $62 million. By far the greatest lost service was the decline in water flow regulation.
Location of Kenyan Water Towers

Forests create soil conditions that increase water retention. In rainy seasons, they absorb excess water, reducing erosion and improving water quality. In dry seasons, the soil slowly releases this water, mitigating drought.

The Water Towers reduce extremes by absorbing and then releasing water. This is a valuable service in a country where climate extremes drastically affect the country's economic output. Deforestation reduced this and other benefits. By looking at the different uses of water (irrigation, hydropower, household uses) and other forest benefits (carbon storage, reduction in malaria), the report comes to the $62 million estimate above.

Is this a good approach for Kenya?

There are a lot of criticisms, but I'll talk about just a few. How confident are the authors in this precise number they have calculated? There are a lot of uncertainties and assumptions that go into the valuation. Are they leaving anything out? I didn't see, for instance, an estimate about what was done with the land after it was deforested...presumably it was used for agriculture, which would have value. And valuing water is really tough. The marginal value of water (the value of one additional unit of water) is very low when it is abundant. If I have 1,000 liters of water, 1 liter more doesn't make me much better off. But if water is scarce, its value approaches infinity. What is the value of 1 liter when I have 0 liters?

Another issue is that just doing a valuation doesn't address equity issues and how the benefits are distributed. Clearing land for timber concentrates the benefits - only the timber companies and their employees benefit. Water and other non-market services are distributed more evenly throughout the population. Farmers throughout the country rely on these water services. So just doing a valuation doesn't address issues about power and politics in the country. Is there political will to curb timber companies' activities? Is there the capacity? Benefits can also be distributed unevenly over time (future generations will benefit much more from climate change action than we will, for example). There are policy solutions (payment for ecosystem services) that this approach suggests, but it's not a silver bullet.

Finally, should we be doing this? Hopefully it will lead to better management of natural resources, but commoditizing nature - something that has intrinsic value - turns a lot of people off.

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