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VALUATION CONCEPTSAND METHODS
James Pittman and Ronald J. McCormick
If we keep our pride;Though paradise is lost;
We will pay the price;But we will not count the cost.
Neil Peart, Bravado
Economics as a science has historically focused on research and analysis to informand guide the allocation of scarce resources to meet human needs. Early methodolog-ical developments in economics place primary emphasis on efficiency in expensesfrom utilization of human labor, as well as investment and maintenance of built orman-made capital (building, vehicles, equipment, etc.), given that these resourceswere relatively scarce in comparison to the abundance of natural resources. Centurieslater, natural resources have generally become more scarce as a result of increasingconsumption and pollution, to such an extent that it has been difficult to adequatelyaddress and manage given the limitations of conventional economic theory and meth-ods. Pioneering ecological economist Herman Daly frames this as the transformationfrom an empty-world perspective, in which the scale of the economy is quite smallwith unlimited room to grow in relation to natural limits, to our current full world
Environmental Risk and Management from a Landscape Perspective, edited by Kapustka and LandisCopyright 2010 John Wiley & Sons, Inc.
362 ECOSYSTEM SERVICE VALUATION CONCEPTS AND METHODS
reality in which resources are scarce and waste assimilation overburdened as the scaleof the economy has grown closer to the total carrying capacity of natural systems. Inresponse to this trend, ecological economics represents the most recent developmentin scientific theory and methods to provide a new level of sophistication in optimizingthe maximum potential utility from capital investments that will cultivate resiliencein natural and human resource use.
Because it is no longer sufficient for economics to focus on efficiency throughresource allocation, we must also optimize the generative processes of resource produc-tion. Given that the health and well-being of humans both individually and collectivelydepend on natural resources, the flow of value and benefit from this source is the ulti-mate means generating economic utility. Economic utility is maximized when anydecision on resource allocation yields a return on investment greater than the invest-ment itself; investment banking demonstrates this dynamic as interest rates determinethe net rate of return on invested principle. In the case of natural resource productiv-ity, the rate of return on investment serves to guide resource efficiency in a mannerthat will cultivate principal investments in natural capital in order to maximize theproduction of ecosystem services. Efficient and resilient ecosystems are essential tosupport a human society, and subsequently to sustain an economy: The planet, thepeople, and the prosperity of both are inextricably intertwined and interconnected.
In order to address contemporary challenges, modern economic theory and meth-ods require a worldview that balances distributed allocation of investments in built orman-made capital as well as in social or cultural capital and natural capital. This subtleshift in perspective is fundamentally important to the ecological economic worldviewsince it allows for any potential to raise the importance of investments in natural andsocial or cultural capital to a level that is as critical as, if not more critical than, invest-ments in man-made built capital or even in financial capital. This can be seen mostclearly in the tendency for investments in natural capital to appreciate in value overtime as resilient, diverse forests, rivers, and wetlands demonstrate natural processesof ecosystem succession, species adaptation, and evolution. In contrast to the appre-ciation of natural capital over time, built capital depreciates and requires continualinvestment to maintain.
The framework for a transformation in economic worldview is perhaps mostclearly summarized by ecological economic distinctions between weak and strongdefinitions of sustainability:
A goal of maintaining the total stock of all forms of capital regardless of con-versions of natural capital to built capital would constitute weak sustainability.
Strong sustainability requires precautionary conservation of critical natural cap-ital as holding primary importance as the productive means giving rise to otherforms of capital (Pearce and Atkinson 1993).
Ecosystem service economics provides methods and tools for putting this theory inpractice, so that public and private policy makers can recognize the value of criticalnatural capital from an economic perspective, in terms of both qualitative assessmentand quantitative valuation.
ECOSYSTEM SERVICE VALUATION CONCEPTS AND METHODS 363
Public and private decision-makers rely on financial and economic tools that offerlimited use when valuing ecosystems and the services they provide. This is preciselywhy public officials and policy managers as well as business executives and managersare more and more frequently considering indicators of environmental performance.Such an integrative approach helps to clarify the extent to which quality of life isdependent on ecosystem resilience and integrity and influenced by resource scarcityand pollution. It also reveals a need for further research into ethical and social justiceramifications of how equitably humans are sharing the opportunities and burdens ofenvironmental resources, constraints, and effects.
Development of more robust tools for project appraisal, program evaluation, andpolicy analysis is driven by a need for nonfinancial performance measures. This needis most obvious when evaluating social and environmental effects that are not readilymonetizedthat is, adequately quantified in financial terms using market data. Theseeffects, often called negative externalities, constitute a failure of financial analy-sis and economic markets to adequately address critical issues of environmental andsocial sustainability. Examples of externalities include, but are not limited to, indus-trial pollution, accidental toxic contamination, environmental risk, hazard mitigation,consumption of ecological resources at levels higher than regeneration rates, or anyother form of cost avoidance with potential to limit optimal performance in areas ofenvironmental, health, or safety management.
Negative externalities ultimately amount to production or development thatimposes, usually without explicit approval, economic costs and risks on social andecological systems. Admittedly, there are cases, however rare, of positive external-ities, benefits received without cost, to a social or ecological system. Conventionalfinancial and economic analysis tools tend to not consider externalities due to marketprices or financial accounting not representing the underlying economic value. Theexisting prevalent use of these economic tools for project and policy analysis provesa need for innovative economic tools that include negative externalities for use inpublic and private decision-making.
The economic valuation of ecosystem services, inclusive of ecosystem goods, pro-vides a context for assessing the economic impact of ecological and social externalitiesimposed on a system. Externalities that cause degradation, fragmentation, or destruc-tion of ecosystem components result in the loss of economic value by making theecosystem less efficient in providing goods and services. With this concept of ecosys-tem services, the fields of economics, ecology, and other scientific disciplines haveestablished a broader framework for understanding the economic value that ecosystemsprovide (Dasguptha 1982, Daily 1997, Costanza et al. 1997, Heal 2000). The emergingtheory and application base of ecosystem service analysis is consistent with and com-plementary to more popular concepts like natural capitalism (Lovins et al. 1999). Theconcept of ecosystem services was most prominently popularized by the publication ofthe Millennium Ecosystem Assessment (2005). This publication assesses the currentstate of functional decline in global ecosystems on which human life is dependent, aswell as in possible future scenarios and policy recommendations for intervention.
The complex dynamics of ecosystems result from the interaction of systemstructural components (e.g., plants, animals, bacteria) with system processes (e.g.,
364 ECOSYSTEM SERVICE VALUATION CONCEPTS AND METHODS
EcosystemInfrastructure & Processes
Specific EcosystemGoods & Services
Figure 17.1. Relationship of ecosystems to the goods and services produced (Batker et al.2005a, 2005b).
photosynthesis, precipitation, nutrient transport, gene flow). Ecosystem processesproduce structures, which, in turn, house new processes, which create new structures.It is this materially, energetically, and informationally open hierarchy (Kay et al.1999) of processstructureprocess that human society designates as having aneconomically useful function (e.g., produces wood, filters water, and stores water).With explicit recognition of functional value, an economy emerges from the societaldemand for specific goods and services produced by the ecosystem (Fig. 17.1).
Ongoing development of ecosystem service concepts regularly spawns newand practical valuation tools for use in making management decisions. Whetherqualitative or quantitative, ecosystem service valuation methods provide one ofthe first lenses for understanding the scale of socialeconomic effects on the totalecological productivity of the planet. Specifically, value transfer methods were usedto analyze local sites using aggregated economic data from other research locations;this provided one of the first clear pictures of hu