Is Growth Good for Biodiversity?

by Duncan Gromko

Growth is good for the environment. At least that’s the headline from an Economist special issue on biodiversity.

They argue that, in the long run, economic growth allows countries to invest in governance and technological innovation that improve environmental conservation. This is the idea behind the environmental Kuznets curve (EKC), which says that there is an inverse U-shaped relationship between income and environmental degradation. The argument goes that, early on in a country’s development, it exploits its natural resources to grow. However, at some tipping point, the country stops degrading its resources as growth continues.

Environmental Kuznets Curve. Source: Socialist.wordpress.com

It’s a popular argument since everyone likes growth. If only it were so easy! We could just focus on growth and the rest would sort itself out. Unfortunately there are a lot of reasons to be skeptical.

The statistical, empirical case for EKC is questionable. Some indicators of environmental degradation have peaked in developed countries, but others have not. After a tipping point, deforestation does tend to decrease as a country grows, but greenhouse gas emissions have not. Given the projected impact of climate change on biodiversity, it’s hard to “leave aside the huge unknown of climate change,” as the Economist suggests.

Any time scientific research gets condensed into a newspaper headline, a lot of important nuance is lost. The nuance here is that growth itself is not the reason that some environmental indicators have improved in rich countries. Political, social, and technological changes – which often accompany growth – tend to be the reason that environmental outcomes improve. The Economist brings up agricultural intensification as one technological change that reduces pressure on biodiversity. In this case it is not growth that results in better environmental outcomes, but changing technology that leads to increased growth and reduced pressure on the environment. This is a mistake of confusing correlation with causation – growth itself is not the mechanism of change.

Another issue is that wealthy countries are able to “export” their environmental production. A good example is Japan, which banned timber harvest, resulting in a dramatic revival of the countries’ forests. However, Japan remains a major consumer and producer of timber goods. It pulls this trick off by importing timber products from Southeast Asia, where deforestation rates are amongst the highest in the world. Wealthier countries tend to have higher per capita environmental footprints. While developed countries have been able to export some of their environmental degradation oversees, clearly this won’t work for every country on earth.

Last, the EKC theory does not account for the importance of the environment in enabling growth. Ecosystem services are a major determinant of a country’s productive capacity. If short-term growth leads to significant environmental degradation, per capita income will stagnate and the tipping point envisioned in the EKC will never be reached. The Economist is saying: growth leads to biodiversity protection, but I think they have it backwards. Managing natural resources responsibly can enable and protect growth.

Ecosystem Services and the Panama Canal

by Duncan Gromko

The following was cross-posted with the Public Education Center's D.C. Bureau, which you can find by clicking here.

Lake Gatun, Panama

When ships cross the Panama Canal, a series of locks raise them a full 26 meters. Letting water in and out of the locks uses a lot of water from Gatun Lake – more than 55 million gallons for each ship. As cargo ships become larger, the Canal is being expanded, which would create even more demand for water. Rainfall in Panama varies significantly depending on the season – during the dry season, water withdrawals from the Canal make a significant impact on water levels. Each year, there is a one in fifteen chance that water levels will drop so low that Canal operations are restricted.

Since the Canal generates an annual $1.8 billion in fees for the government of Panama, there is a very real economic reason to ensure continued water flow for the Canal and the expansion of the Canal makes that need even more pressing. As I’ve written about before, forests and other ecosystems play an important role in providing a dependable water supply.

The Canal watershed is 55 percent forested, a 40 percent decline since 1974. In order to maintain water supply to the Canal, Panamanian policymakers have created protected areas for two-thirds of the forested Canal watershed. A 1997 land-use plan aims to increase forest cover in the watershed through reforestation in order to increase water flows to the Canal, particularly during the dry season.

However, a recent study by Silvio Simonit and Charles Perrings (sorry, the full article is behind a pay wall) says this reforestation initiative may be slightly misguided. The relationship between ecosystems and local hydrology is much more complicated than it may seem at first glance. “The net impact of vegetation change on water flows depends on its effects on surface runoff, infiltration, and evapotranspiration. Transitions between vegetation types alter all three.” Forests increase the infiltration of water into the soil, allowing for groundwater recharge. They also increase an ecosystem’s leaf index (the surface area of all green surfaces for a region), which increases evaporation. These two forces counteract each other and local circumstances determine which one dominates.

Canal expansion

The specific results of the study are too complicated for a blog post, but the important takeaway is that reforestation in some places will increase water flow, but in other places will decrease flow. “…Only where there are high precipitation rates, flat terrain, and soil types with high potential infiltration is reforestation likely to enhance dry-season flows.” Only 37 percent of currently forested area increases dry-season water flows; reforestation of the entire area would reduce dry-season flows by 8.4 percent.

In addition to specific recommendations for the Canal watershed, this study has broader implications for policymakers. As the term “ecosystem services” becomes a part of people’s vocabulary, it’s important to understand that the relationship between an ecosystem and the benefits it provides to people is not a simple one. Not all forests directly increase water supply. Some coastal reefs will provide greater storm protection than others. Some biological diversity is more valuable to people than other.

Allow me to indulge in a slight tangent: this brings up two important issues with the push to include ecosystem services into decision-making. First, it means that careful study is needed to be sure that investments in ecosystems lead to the desired benefits. Panama can increase dry-season water flow to the Canal through reforestation, but only if it targets the right areas. It’s even more complicated than the article describes; ecosystems are complex systems that are probably impossible to fully model. For instance, although evaporation from increased tree cover decreases water recharge, it also contributes to cloud formation, likely increasing precipitation elsewhere. Second, reducing the value of nature to the benefits it provides people is, well, very anthropocentric. Is improving human welfare the only reason to protect the environment?

Panama Canal shipping routes

Coming back to Panama, the article points out that there are many other benefits to forest restoration. Although the impact on water supply is ambiguous, reforestation will unequivocally increase carbon sequestration and timber supply. This is where the decision gets really complicated. Does Panama prioritize: a) timber production, which would have a local economic impact, b) water supply, which would also have an economic impact, but on a different population, or c) carbon sequestration which provides global benefits (since it reduces the impact of climate change). And there are other tradeoffs as well: reforestation might increase ecotourism, but will likely require the displacement of agriculture.

All in all, planning based on ecosystem services is complicated. Simonit and Perrings’ study improves our understanding of how the environment impacts people. However, we still have a lot to learn. And the expansion of the Panama Canal is setting off a series of environmental challenges at ports throughout Latin America that need to be addressed.

Unaccounted for Costs of Doing Business

by Duncan Gromko

Coal Plant (Source: Arnold Paul)

Businesses contributed $7.3 trillion - 13% of global GDP - in damages to the world's "natural capital" in 2009. That's the headline finding from the new TEEB for Business report on the unaccounted for costs of doing business. This figure is so high because of the value that ecosystems provide to human well-being.

When a business purchases a building or hires workers, these costs are privatized - only the business pays. However, when the costs of production are not paid for by the business (or government or community or individual), the costs are socialized. These "externalities" are what TEEB is measuring. Socialized costs don't have to be environmental, but that is what TEEB is focusing on. An easy is example is a coal plant. The owner of the plant buys the coal, the plant itself, the machinery needed to operate the plant, and hires the people needed to run the plant. What the owner doesn't pay for is the damages done by production to society. These costs can be local - if particulate emissions from the plant damage nearby communities' health. Or they can be global - the CO2 emitted by the plant contribute to climate change and the associated costs.

TEEB breaks these costs down by sector and by world regions:

In terms of absolute damages to natural capital, the greatest damages are done by power generation (coal) and agriculture (cattler, wheat, and rice). Most of coal's damage comes from its greenhouse gas emissions; TEEB estimates that total damage done from greenhouse gas emissions amounted to $2.7 trillion in 2009. Coal also does damage via air pollution (cost of air pollution = $0.5 trillion), but its impact on climate change is what makes it the villain. Agriculture's damages are a little more disbursed. Agriculture contributes to damages via land use change (natural ecosystems converted to agriculture - $1.8 trillion), water consumption (cost of water consumption = $1.9 trillion), greenhouse gas emissions (like methane from grazing animals), and land and water pollution (cost of land and water pollution = $0.3 trillion). 

The report ranks the top 100 most damaging sectors by region, so if you want greater detail about the most damaging sectors, check out the full version.

Geographically, the location of the these five sectors is unsurprising. Coal is biggest in East Asia and North America; energy consumption drives the Chinese and American economies, the two biggest in the world. Agriculture is huge in South America and South Asia, where population explosion is driving continued expansion into natural ecosystems. These regions also export a significant amount of agricultural goods.

An interesting finding of the report is the impact ratio. What TEEB is doing here is dividing the natural capital cost by the revenue generated from the sector. Although coal has huge damages, its monetary benefits nearly equal those costs. It is damaging, but productive. Agriculture, however, has returns that are much lower, meaning that its impact ratio is higher. Cattle ranching in South America, is the biggest culprit. I'm reminded of the trip that Nick and I took to Brazil, where we researched forestry issues in the Atlantic Forest. A big eye-opener for us was how unproductively deforested land was being used - an entire hectare of land was needed to support one cow. 

David Roberts wrote about this report just before I did (as he always seems to). He highlights one finding from the report:

"Of the top 20 region-sectors ranked by environmental impacts, none would be profitable if environmental costs were fully integrated. Ponder that for a moment. None of the world’s top industrial sectors would be profitable if they were paying their full freight. None!"

I'm not sure if Roberts means it this way, but the tone of this quote and that of the TEEB report sort of suggests that business is at fault for the situation. If everything else was equal, yes, internalizing environmental costs would make businesses unprofitable. But, if costs were internalized, business revenues would be higher. If farmers had to pay the full social costs of production, they wouldn't just go out of business. We still need food! Instead, some of these costs would be passed onto consumers. Food and energy would cost more. Internalizing costs would change incentives for producers and consumers, leading to a radical restructuring of the economy. Sectors with low impact ratio (say, solar production) would become more profitable compared to sectors with high impact ratios. Coal production would most likely be unprofitable.

What's to be done about all this? TEEB has a long list of recommendations for businesses, governments, investors, and even for itself. They are excellent suggestions for economic methodologies to internalize socialized environmental costs. However, what's really missing is the political will to enact these changes.

Putting a Price on Climate Change: Lord Nicholas Stern

by Duncan Gromko

Lord Stern; Source: Global Risks

Lord Nicholas Stern spoke at an event yesterday at the International Monetary Fund (IMF) and organized by the World Resources Institute (WRI) on climate change and how we should react to it (full powerpoint found here). Lord Stern is most famous for a report that estimated that climate change would cost the world about 5% of global GDP per year. The report also estimated that the cost of mitigating climate change was only 1% of global GDP year. It was an argument that should have appealed to a wide range of people: mitigating climate change is less costly than adapting to it. Lord Stern presented on a number of other issues, but I'm going to focus on his discussion of this report and how it fails to fully reflect the cost of climate change.

This broader cost estimate has led to a number of derivative figures. For one, the cost of climate change has also been put into a dollar amount per ton of CO2 emitted. In other words, Lord Stern's estimate of the cost of climate change is being divided by the total number of tons of CO2 emitted that will get us to his assumed temperature rise. Stern's model put the cost at $85 per ton. The EPA estimated the cost at $24 per ton. Just for context, most discussions of a potential carbon tax in the US have considered a tax of $5-20 per ton.

Another example of pricing climate change is a report by the IMF, which discusses the cost of fossil fuel subsidies. It estimates that the cost of our traditional way of thinking about subsidies (how much the government directly gives to energy consumers or providers) is around $480 billion per year. The IMF also estimates that the "externalized" cost of greenhouse gas emissions - which is the same thing as saying the price of climate change - is another $1.4 trillion per year. This is actually a lower estimate than Lord Stern's estimate since it amounts to an annual 2.5% of global GDP.

That's a roundabout way of saying that economists are helping environmentalists articulate the cost of climate change in a way that policy-makers can understand.

What surprised me most about Lord Stern's presentation at the IMF was how critical he was of this very approach. There are basically three problems.

One problem is with uncertainty in modeling the physical consequences of climate change. As an example, Lord Stern brought up methane trapped in permafrost in the Arctic. As the arctic melts, this huge quantity of methane will be released. Methane is a potent greenhouse gas, so this will raise global temperatures. Which will release more methane. Which will raise global temperatures. These sort of positive feedback loops create a ton of uncertainty for modelers because no one knows when they will be triggered. Lord Stern said yesterday that, since they couldn't accurately predict this feedback loop, they just left it out of the model.

A second problem is modeling the impacts of climate change on human output; even if you can predict how climate will change, it's difficult to predict how humans will react. One example is agriculture in India. The Stern Report simply estimates how agricultural productivity will change for a region facing increased temperatures. It doesn't take into account more complex (and harder to predict) consequences such as reduced water flow from Himalayan glaciers or changes in the timing and quantity of monsoon rains.

Beyond modeling the physical consequences of climate change on human output (like agricultural productivity), a final problem is translating the human output  economic values. If you want to get deep into this issue, I recommend this paper by Dr. Joshua Farley (I've also written a short version of Dr. Farley's arguments). One issue that Lord Stern brought up is that any of these cost of climate change models are assuming a constant annual world growth rate of something like 3% GDP, then reducing this estimate by the fraction that they predict climate will affect the economy. This methodology doesn't take into account that the damage caused by climate change will lower the productive capacity of the economy. The flood in Pakistan, for instance, didn't just reduce GDP by x%, it set the flooded region back decades in terms of their development by destroying human and physical capital that Pakistan had invested in.

A related problem is discount rates (considered at length by David Roberts). Essentially, economists compare present and future benefits by reducing the value of benefits by some discount rate. On a personal level this makes sense: would you rather have $100 today or $100 10 years from now? Lord Stern argued, however, that for intergenerational valuations, discount rates undervalue the benefits to future generations. Using discount rates is assuming that people are going to be richer in the future - it's assuming continued economic growth. If people are poorer because of climate change, reduced resource availability, or any other factor, you should actually have a negative discount rate (meaning that benefits tomorrow would be valued higher than benefits today). Lord Stern said that "the discussion of discounting today is truly awful."

It was refreshing to hear one of the biggest intellectual creators of the market-based approach to the environment discussing the problems with it. He argued that as climate scientists and economists are becoming aware of these problems, they are doing a better job of accounting for them in models. I would also add that, disagreements about the accuracy of these estimates aside, this new language that environmentalists have is a powerful tool. For the IMF to say that climate change is "the greatest economic challenge of the 21st century," that represents a huge change in thinking.

So, it was an interesting presentation - I was surprised and impressed with how critical Lord Stern was of his own approach. Environmental economists have made a concerted effort to value the costs and benefits associated with natural resources, but are still struggling to do so in the neo-classical economic framework. In the mean time, however, these dollar figures still provide an impressive political argument for better management of the environment. As Lord Stern, said, the primary remaining obstacle isn't an understanding of climate, economic analysis, or access to appropriate technology. The obstacle is a lack of political will.

Markets and the Environment

by Duncan Gromko

There's a great audio file up of a recent presentation by Joshua Farley. If you have 80 minutes to burn, I really recommend listening.

Dr. Farley lays out the new approach of thinking of the environment in terms of benefits to humans - ecosystem services. In short, the market has mostly ignored value of ecosystem services, meaning that we have fewer environmental services than "optimal." Having identified and quantified this value, there is optimism that we can "internalize" ecosystem services by including them in markets.

Recognizing the benefits to such an approach, Dr. Farley then explains how, even using the ecosystem services framework, markets can never do a good job of managing natural resources.

I love the context he provides for his critique of neoclassical economics. When economists were coming up with these ideas, the world population was one-fourth the size and per capita consumption was one ninth what it is now. That means that our economic output is now 36 times greater! At the advent of the industrial revolution, natural resources were abundant and human-made products were limited. Using natural capital to create built capital made a lot of sense. Now the situation is reversed and we are constrained by limited natural resources, but economic thinking has not adjusted! Nature is assumed to be limitless.

Some economists and environmentalists are thrilled by the idea of ecosystem services because, having identified these benefits, we can use markets to protect them. A simple example is a situation where an upstream farmer is clearing trees from his land, negatively affecting a downstream individual, like a hydro power plant. The market solution is to value the benefit of the trees on the farmers land to the hydro owner and for the hydro owner to pay the farmer that amount. The farmer is better off because of the payments and the hydro owner is better off because her power plant is more productive. Win-win, or in economic speak, a Pareto outcome. In some situations this mechanism (known as payment for ecosystem services - PES) may be effective, but Dr. Farley says that, for the most part, markets will fail to protect ecosystem services for many reasons.

One reason is that markets discount benefits to future generations. A discount rate is used to value benefits today over benefits tomorrow. This makes sense for most situations: would you rather have $100 today or $100 ten years from now? Clearly money today is worth more - you could invest that money and have much more in ten years or spend the money now on something you need immediately. But for inter-generational benefits, the discount rate values benefits far in the future as close to zero. In a climate change cost-benefit analysis, what we're saying is that benefits to future generations from reducing green house gas emissions are worth much less than the benefits that come from pollution-causing activities today. Neoclassical economics makes this mistake because it assumes perfect substitutability, the second problem outlined by Dr. Farley.

Neoclassical economics assumes that all inputs and goods (capital, labor, and natural resources) are substitutable. For example, a car factory can replace workers (labor) with machines (capital) and produce the same amount. You can do this to an extent with natural resources, but at some point natural resources are not substitutable! Climate change may reduce agricultural output by one third, but since agriculture is such a small part of GDP, according to this model, no big deal! We can substitute agricultural products with more TVs or cars. But this is obviously absurd: at some point you can't substitute food! Applying the discount rate to benefits to future generations is assuming that decline in ecosystem services because of climate change can be substituted by other products and services from built capital.

A related issue is that we're getting marginal benefit/cost analysis wrong. What is the added benefit of an extra bushel of wheat versus the cost of producing that bushel? Most of the time this works: if there are fewer bushels, the value of an extra bushel goes up. If there are many bushels, the value of an extra bushel goes down. But at some point (when someone is starving), the value of an extra bushel nears infinity! Markets have no way of dealing with infinite value.

This is an especially important concept when talking about critical natural capital. Ecosystems are not simple resources that produce benefits proportionate to their size. Take the Amazon rainforest. Destroying 1% of the Amazon reduces the ecosystem services provided by the rainforest by X amount. But if you destroy 20%, it doesn't reduce services by 20X. Since the rainforest actually generates most of the rainfall that trees use, destroying 20% of the rainforest would lead to lower rainfall in other parts of the Amazon. Drought would lead to tree die off, more forest fires, and the possible collapse of the entire ecosystem. There are tipping points beyond which the Amazon cannot recover. If the tipping point for the Amazon is 20%, the cost of destroying 20% is much much more than 20X, it could be as much as the entire value of the rainforest. Economics has a tough time dealing with that.

A third problem is equity. Markets distribute resources based on purchasing power and price signals (the value of a good is the price paid for it), not where the resource would be best used. If you have a finite quantity of ecosystem services, people with the most money will "buy" most of the ecosystem services. A poor farmer in India cannot afford to pay as much for clean water as a banker in New York. Distributing resources by purchasing power leads to "bad" outcomes. Say, for example, there were 100 extra calories per person per day produced in global agricultural markets. Most of these calories are going to end up in wealthy countries where there is actually negative value to additional consumption (wouldn't most Americans be healthier if they ate a little less?) instead of where those calories would have a greater benefit: in the stomachs of those who don't have enough.

In terms of ecosystem services, this distribution is particularly damaging. The poor are much more dependent on ecosystem services than the rich. Take a mangrove in Indonesia that provides locals with protection from storms and food from the fish that live in the mangrove. If the mangrove is destroyed, a wealthy Indonesian can buy food from elsewhere; their home may be more threatened by storms, but they can afford to move. A poor Indonesian will be much more impacted as they cannot afford to move or purchase food elsewhere. I like how Dr. Farley summed this up: markets don't distribute resources to the most important uses, they distribute resources to the most important people!

Despite all these problems, Dr. Farley still likes the idea of ecosystem services. It's a great way of talking about the environment in terms of value to people. The environmental movement previously talked about things like pandas and tigers, which people in developed countries like, but do not affect them in a tangible way. Now we're talking about human well-being and things that matter. However, just because we are starting to better understand the value of nature, that doesn't mean that we use that value information to let the market determine resource distribution. If we do, we will: 1) undervalue future generations; 2) risk destroying critical natural capital; and 3) exacerbate wealth inequality.

What's the solution? Valuing ecosystem services is a start and hopefully it will better communicate the magnitude of these issues to policy makers. But as Dr. Farley says, we need to seek economic institutions that work with ecosystems rather than trying to internalize ecosystems into our existing system. Not particularly satisfying, but if we had an easy answer, we wouldn't be in this mess.

Why Don't We Value Resources Better?

by Duncan Gromko

There was a great article in the National Journal last week about the costs of climate change. Coral Davenport lays out a lot of estimates of what the impact of climate change will be on industry, business, and the general health of the economy. Putting the emphasis on dollar amounts is a great way to frame the debate because you can start to compare the cost of reducing carbon emissions to the cost of inaction. Solar may be more expensive than coal (although the cost difference is shrinking quickly), but using coal and other fossil fuels has other costs, the most alarming among them: climate change.

An example of the costs is the increase in insurance pay outs due to disasters. 2011 and 2012 were the most costly years, with annual losses of around $60 billion (compared to an average of $27 billion). However, that pales in comparison to estimates for 2025: $270 billion.

If there are such high costs to climate change, why aren't they accounted for in the market?

Adam Smith's idea of the "invisible hand" suggests that free markets are the most efficient way to allocate resources and maximize well-being. When an Arsenal fan like me buys one more Arsenal jersey, the price I pay represents how much I value the the jersey: the marginal social benefit (MSB). The price of the labor and materials it took to produce the jersey is the marginal social cost (MSC). So my Arsenal jersey is perfectly in equilibrium: its production costs society the same amount that society benefits.

Source: PSU

In this idealized world, the prices set by markets reflect the social benefit (MSB) and social cost (MSC) of good consumption. 

But things are rarely this perfect...if we could all just be Arsenal fans. Now, take a Chelsea jersey factory that dumps its effluent into a nearby river (any surprise that a team with a racist captain who taunts Americans post-911 would also produce their jerseys in a terrible way?). The polluted river is now less productive for fishermen or is creating public health problems. The cost of pollution is borne by people who have nothing to do with the buying and selling of Chelsea jerseys - the costs are "externalized." The value, or benefit, of the jerseys produced is high, but it doesn't take into account the impact, or cost, of the effluent. A solution is to charge the Chelsea factory a fee for those costs. This would drive up the price, decrease demand, and probably lead to fewer jerseys being created (or maybe the factory would find a way to reduce its impact).

So this is how a market failure, like the Chelsea jersey factory, undermines the "invisible hand" utopia. The price of a good is supposed to take into account its cost. But if part of the cost is externalized, the price signal is wrong.

Source: Mr. Wood

This can put us in a situation where marginal private cost is lower than marginal social cost and we end up consuming and producing more than we "should."

Greenhouse gas emissions are the ultimate externality. The cost of emitting carbon isn't borne by those who use a local river, but by the entire world.

This is economists' take on why we value resources poorly. What was frustrating to me in my economics study is how externalities and other market failures are kind of an afterthought at the end of the textbook: externalities are acknowledged, but they're not big enough to undermine the model. But, if we're talking about global ecosystem services being worth $33 trillion per year, then clearly the market is missing an important signal. It's not just greenhouse gas emissions and their effect on climate that is "externalized;" there are a host of environmental services that are not priced by the market. If the market model is going to be a useful tool for making economic decisions, there has to be a lot more research like Coral's and the political will to incorporate these environmental services into the cost of goods. Otherwise the invisible hand is going to lead to some very bad outcomes. This sort of analysis is why a carbon tax appeals to many people as a solution to climate change. If you can value the social cost of carbon and add its price to carbon goods, you'd get closer to the market utopia.

Another aspect is that these costs are distributed unevenly throughout society. People who were hurt by Hurricane Sandy or farmers who saw their production plummet in the summer drought are affected by climate change much more than me. What I like best about Coral's article was how she brought a personal element to these costs:

"And Strickland [a businessman] fully expects someone, whether it’s him or taxpayers, to pay more in the future, as sea levels climb higher. 'In the last couple of years, we’ve seen more and more evidence of the waters rising,” the accountant says. “I’m just a small businessman. I’m looking at my building, on the impact of this on me and my employees; but other people are going to start thinking, am I going to want to relocate my business here?'"

(DISCLAIMER: I'm sure Arsenal and Chelsea jerseys are actually produced in the same factory and have the same environmental cost. But it's still fun watching their captain fall flat on his face).

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.

Intro Post - What Are Ecosystem Services?

This blog is going to discuss a number of current environmental issues. I want the concept of ecosystem services to be the foundation of this discussion. Since I think this is a critical concept - both for further writing in the blog and environmental/economic decision-making - I'm going to use the intro post to explain what the concept of ecosystem services means and why it has become the focus of many environmentalists. Other posts aren't going to be so basic and focused on definitions and will instead focus on current events and issues.

What are ecosystem services?
Although there are a number of writers who have brought up the idea of ecosystem services (this article provides a good history), the Millenium Ecosystem Assessment (MEA) is the seminal work that really popularized the concept. Their definition of an ecosystem is:

"An ecosystem is a dynamic complex of plant, animal, and microorganism communities and the nonliving environment interacting as a functional unit. Humans are an integral part of ecosystems. Ecosystems provide a variety of benefits to people, including provisioning, regulating, cultural, and supporting services."

Ecosystem services are the multiple ways in which the natural world benefits humans. These benefits are sometimes obvious and sometimes more subtle, but we could not exist without them.

The MEA categorizes ecosystems services into four types: supporting, provisioning, regulating, and cultural. These services support security, basic material, health, and good social relations:

This is a hugely important diagram, but all the arrows make it a little more confusing than it needs to be.

Moving left to right, what the diagram is saying is that supporting services underpin the basic functioning of ecosystems. Nutrient cycling, soil formation, and more allow ecosystems to thrive. For instance, without pedogenesis - the conversion of organic material into soil - terrestrial ecosystems couldn't function. Soil and the nutrients it holds allow plants to grow. Supporting services don't directly provide benefits, but they enable the next set of services - provisioning, regulating, and cultural. This is where this concept becomes more tangible and easy to link to human well-being.

Provisioning is the easiest to explain. Agriculture, timber, fresh water, fisheries, etc. provide humans with the building blocks of life. These services are easiest to measure: e.g. 83.13 million metric tons of soybean were produced in 2011.

Regulating services are a little more abstract, but also hugely important. A couple examples: first, trees and other organic material sequester carbon dioxide; the concentration of carbon dioxide plays a large part in the determining the temperature of the earth's atmosphere. Second, vegetation also plays a critical role in reducing erosion and accompanying landslides and floods. In places like Rio de Janeiro, landslides are the direct result of deforestation.  Mangroves and other coastal wetlands play an important role in reducing the impact of devastating storms. There are numerous other examples of regulating services, but I'll share just one more example. Vultures in India and elsewhere (see here and here) play an important role in decomposing dead animal carcases. Farmers administer a pain killer, diclofenac, to reduce the pain of dying animals, that is coincidentally deadly to vultures. Without this natural removal of carcasses, it is easier for disease to spread and the feral dog population has exploded.

Cultural services cover the remaining ecosystem services. Some, like recreational services, are easy to ascribe value to. Tourism that is dependent on nature (beaches, hiking, etc.) is obviously connected to beautiful ecosystems; eco-tourism has a obvious economic benefit. On the other hand, 'spiritual' ecosystem services are impossible to measure.

The next set of arrows is overly complicated, but the essential idea is that these services underpin human well-being.

Why has this idea become so popular?
I think that so many environmentalists have started using the ecosystem services framework for basically two related reasons.

1) The focus on 'biodiversity' and high profile species (see WWF's tiger and panda campaigns) has failed to stop widespread degradation of important ecosystems. While these animals do pull the heartstrings, direct human interest ultimately prevails. By changing the focus to ecosystem services, environmentalists are shifting the argument to how the environment affects humans rather than its inherent value. Once benefits are defined, they can be given economic value: a popular study has valued global ecosystem services at an annual US$16–54 trillion. I'll write some more posts about the benefits and problems of such analysis, but, setting criticisms aside, it is an eye-catching number.

2) Defining ecosystem services and their economic value should allow the environment to be incorporated into mainstream economic decision. Through ascribing values to ecosystem services and modeling different scenarios, defining ecosystem services should impact decision-making. I'm working on issues such as this and I'll be writing more about this in the future.

I welcome any feedback or suggestions. And I promise that future posts will be less definitional and deal more with contemporary issues.