Ecosystem ValuationEcosystem Valuation ES 100: November 17th, 2006

“We have estimated the current economic value of 17 ecosystem services for 16 biomes, based on published studies and a few original calculations. For the entire biosphere, the value (most of which is outside the market) is estimated to be in the range of US $16-54 trillion per year, with an average of US $33 trillion per year…

Global gross national product total is around US $18 trillion per year.”

~Costanza, et al, “The Value of the World’s Ecosystem Services and Natural Capital” Nature, May 1997

Economy vs. Ecology?

• Both words have the same Greek root,“oikos”

• Economics: focus is humans

• Ecology: focus is all living things

Environmental Economics: Externalities

• Externalities: costs or benefits that are (imposed and) not paid for by the consumer or producer.– Positive externality: beneficial external cost

• Apple orchard and apiary

– Negative externality: harmful external costNegative externality: harmful external cost• Pollution• Biodiversity Loss

• Neg. Externalities can be ‘internalized’ by making buyer/seller pay costs– Regulation (Taxes, Fees, Tradable pollution permits, permits….)

Market vs. Non-Market GoodsMarket goods: things that are bought and sold. Value is net benefit (producer + consumer surplus)

Non-market goods: things that are not bought or sold

Wetland Ecosystem Services

• Food/Jobs• Important Habitat for Species• Clean water/Nutrient storage• Flood control• Erosion control• Carbon storage• Tourism

Which are market/non-market goods?

How Non-Market Goods are Valued

• Revealed Preferences: visitation rates for eutrophic vs. mesotrophic lake

• Contingent Valuation: ask people (surveys)

• Cost of Substitutes

Each has its own advantages and disadvantages!!

Species U.S. $ per person per year

Grizzly Bear 18.5 Bald Eagle 12.4 Blue whale 9.3 Bighorn sheep 8.3 Bottlenose dolphins 7.0 Endemic shiners (fish) 4.3 Whooping Crane 1.2

…….but, future costs & benefits are .but, future costs & benefits are not always known…not always known…

Expected Costs and Benefits

Expected Value of Betting Red on Roulette

Outcome Probability Value#1 Red 18/38 $1

#2 Black 18/38 -$1#3 Green 2/38 -$1

EV=p1V1 +p2V2+…pnVn

EV=(18/38)($1)+(18/38)(-$1)+(2/38)(-$1)= - $0.05

This is NOT a good bet!

• Calculate Expected Costs/Benefits– Separate possible outcomes (‘states of the world’)

– Assign probabilities to each possible outcome– Compute the Expected Value by

EV=p1V1 +p2V2+…pnVn

p1+p2+… pn=1Key:

EV = Expected Valuep1= probability of outcome #1V1= value of outcome #1p2= probability of outcome #2V2= value of outcome #2pn= probability of outcome #nVn= value of outcome #n

Expected Value of Invasive Species Eradication Policy

•Could compare to costs of damage done by invasive •Adopt policy if cost from damage > cost to eradicate

•Could compare net benefit of Policy 1 to Policy 2•Select policy with largest net benefit

Degree of Invasion Probability Cost of Policy (millions/year)Low 85% 0Med 10% 10High 5% 80

Avoided damage costs from invader: $3 mill/yr (this is the ‘benefit’ of adopting thepolicy)

Human Perceptions & C-B Analysis

The Future is Uncertain: Discounting

Why are future costs and benefits devalued?

_____________________________

_____________________________

_____________________________

**Humans like benefits now, costs later

Discounting the Future

Present Value of $100

0

20

40

60

80

100

120

0 50 100 150

Years in Future

Present Value ($)

r =.10

$100 received in 50 years isn’t worth as much as $100 now

To avoid $100 in costs 50 years from now isn’t worth paying $100 now

Future Benefits are devalued:

Future Costs are devalued:

Discounting Formula:

( )nn

pr

VV

+=

1

Key:

n = year (n=0 is the present, n=1 is next year…)Vp = Present value ($)Vn = Value in year ‘n’ ($)r = discount rate (fraction)

Present Value of $100

0

20

40

60

80

100

120

0 50 100 150

Years in Future

Present Value ($)

r =.10

r = .05

Discounting vs. Sustainability

• “Sustainable” practices usually have high initial costs, and a long stream of benefits.

• Does discounting favor sustainable, or unsustainable practices?

• How does this apply to (other) environmental problems?

Net Present Value: Discounting a Stream of Payments (Cost/Benefits)

Evaluating the benefit of removing invasive Melaleuca:

You are hired to determine how much money is reasonable to spend on a policy to eradicate Melaleuca from the Florida Everglades. You believe that the annual cost of this invasive species is $100 million per year.

Evaluating the Cost of Melaleuca Eradication

You are in charge of managing invasive Melaleuca in the Florida Everglades. You are evaluating the followingtwo methods of management:

Physical removal: Cost = $1 million/year, forever

Massive poisoning: Cost = $10 billion (one-time cost)

Which technology should you use, from an economic standpoint? (assume costs incorporate all externalities)

Economy vs. Ecology? Disproportionalities

Globally, the 20% of the world's people in the highest-income countries account Globally, the 20% of the world's people in the highest-income countries account for 86% of total private consumption expenditures – the poorest 20% a for 86% of total private consumption expenditures – the poorest 20% a

minuscule 1.3%.minuscule 1.3%. More specifically, the richest fifththe richest fifth:

• Consume 45% of all meat and fish, the poorest fifth 5%.

• Consume 58% of total energy, the poorest fifth less than 4%.

• Consume 84% of all paper, the poorest fifth 1.1%.

• Own 87% of the world's vehicle fleet, the poorest fifth less than 1%. — Human Development Report 1998 Overview, United Nations Development Programme (UNDP)

Valuing Biodiversity: Key Points

• Environmental Economics: Deals with Externalities• Cost/Benefit analysis in decision making

– Market vs. non-market goods– Valuation methods: revealed preferences, contingent

valuation, cost of substitutes– Calculating C/B under uncertainty: Expected Value

• Environment vs. Economy? – Sustainability – Discounting the Future: Net Present Value– Disproportionalities