Improving the Benefit/Cost Analysis of

Ecosystem Projects

NBWA Board of Directors MeetingJuly 10, Novato, Ca.

Manuel S. Gaspay, Ph.D.Green MBA Faculty, Dominican University

BCA and Ecosystem Management

BCA and Ecosystem Management

Role of Benefit/Cost Analysis (BCA) in the management of ecosystems:Tool for the evaluation of alternative

interventionsTool for communication and facilitation

of discussion with ecosystem stakeholders

Important determinant for capital budget allocation

Role of Benefit/Cost Analysis (BCA) in the management of ecosystems:Tool for the evaluation of alternative

interventionsTool for communication and facilitation

of discussion with ecosystem stakeholders

Important determinant for capital budget allocation

BCA and Economic Valuation

BCA and Economic Valuation

Benefits and costs, as presented in the usual use of BCA, are economic values that are measured in monetary terms.

Therefore, there is almost always an effort at economic valuation of the benefits and costs associated with proposed interventions in the management of ecosystems.

However, there is a class of interventions, usually associated with what is termed as existence values that suffer from the difficulty of making such economic valuation.

Benefits and costs, as presented in the usual use of BCA, are economic values that are measured in monetary terms.

Therefore, there is almost always an effort at economic valuation of the benefits and costs associated with proposed interventions in the management of ecosystems.

However, there is a class of interventions, usually associated with what is termed as existence values that suffer from the difficulty of making such economic valuation.

The Napa Salt Marsh Restoration

The Napa Salt Marsh Restoration

Feasibility study in April 2003 to evaluate alternative habitat restoration plans.

Purpose of study is to evaluate potential Federal interest in habitat restoration with possible funding from a non-Federal sponsor.

The purpose of habitat restoration itself is mostly for the benefit of fish, aquatic species, fowl and birds (migrant and resident) that use the marsh as its habitat.

Evaluation of the benefit of alternative plans were measured in non-monetary terms (i.e. habitat units).

Feasibility study in April 2003 to evaluate alternative habitat restoration plans.

Purpose of study is to evaluate potential Federal interest in habitat restoration with possible funding from a non-Federal sponsor.

The purpose of habitat restoration itself is mostly for the benefit of fish, aquatic species, fowl and birds (migrant and resident) that use the marsh as its habitat.

Evaluation of the benefit of alternative plans were measured in non-monetary terms (i.e. habitat units).

Disadvantages of Non-Monetary Economic

Valuation

Disadvantages of Non-Monetary Economic

ValuationLack of proper appreciation by the general

public of the true benefits, especially when the project competes with other projects that show monetary benefits that justify the monetary cost of the project.

Has to rely on a drawn-out political process of fund allocation rather than the more expeditious capital budgeting process for economically valued investment projects.

Lack of proper appreciation by the general public of the true benefits, especially when the project competes with other projects that show monetary benefits that justify the monetary cost of the project.

Has to rely on a drawn-out political process of fund allocation rather than the more expeditious capital budgeting process for economically valued investment projects.

Problem of Economic Valuation

Problem of Economic Valuation

The problem of using BCA in the management of ecosystems is the tendency to under-estimate the full economic value of the benefits provided by ecosystem services and the full costs of unsustainable usage of ecosystem assets.

This is mainly due to the difficulty posed by the monetary valuation of ecosystem services that are non-marketed, use values that are not fully accounted for by markets, and non-use values of environmental asset.

The problem of using BCA in the management of ecosystems is the tendency to under-estimate the full economic value of the benefits provided by ecosystem services and the full costs of unsustainable usage of ecosystem assets.

This is mainly due to the difficulty posed by the monetary valuation of ecosystem services that are non-marketed, use values that are not fully accounted for by markets, and non-use values of environmental asset.

Why Markets Fail in Valuing Ecosystem

Services

Why Markets Fail in Valuing Ecosystem

ServicesPublic good nature (jointly consumed and impractical to privately appropriate) of most of these services do not make markets for them feasible.

Market prices for those that are marketed fail to capture externality effects (effect on others not parties to the market transaction).

Market prices essentially reflect scarcity values and not use values (price of clean air is zero, but no economist will tell you it has no economic value).

Public good nature (jointly consumed and impractical to privately appropriate) of most of these services do not make markets for them feasible.

Market prices for those that are marketed fail to capture externality effects (effect on others not parties to the market transaction).

Market prices essentially reflect scarcity values and not use values (price of clean air is zero, but no economist will tell you it has no economic value).

Types of Values of Ecosystem Services

Types of Values of Ecosystem Services

Use valuesDirect use value - recreation servicesIndirect use - climate control

Non-useOption value - deferred useBequest value - use by future

generationExistence value - pure non-use

Use valuesDirect use value - recreation servicesIndirect use - climate control

Non-useOption value - deferred useBequest value - use by future

generationExistence value - pure non-use

A full value method done by Constanza in 1997 gave an estimate of $33 trillion a year, which was almost double the $18 trillion total value of the world’s GDP (marketed goods and services).

A full value method done by Constanza in 1997 gave an estimate of $33 trillion a year, which was almost double the $18 trillion total value of the world’s GDP (marketed goods and services).

What is the Value of the World’s Ecosystem Services?

What is the Value of the World’s Ecosystem Services?

GDP ($18 B)

Eco Services($33 B)

Marketed Goods (GDP) vs. Ecosystem Services

Marketed Goods (GDP) vs. Ecosystem Services

Ecosystem Services: A Guide for Decision Makers

Net present value [real] per hectareNet present value [real] per hectare

Mangrove: $35,696

Shrimp farm: -$5,443

Value (USD/ha)

0

5000

10,000

Mangrove Shrimp farm

Coastal protection ($34,453)

Shrimp (net): $8,340

Less subsidies (-$7,176)

Timber and non-timber products ($823)

Fishery nursery ($420)

Pollution Costs (-$951)

Restoration (-$5,656)

Net present value [market] per hectareNet present value [market] per hectare

Mangrove: $823

Shrimp farm: $8,340

Note: 10% discount rate

Source: Sathirathai and Barbier 2001

Methods for Discovering Value:

Discovering the WTP (willingness to pay)

Methods for Discovering Value:

Discovering the WTP (willingness to pay)

Market method - commercial fisheryMarket-based methods

Productivity change - soil formationHedonic pricing - majestic sceneryTravel cost - park visitsAvoided/replaced/substituted cost -

flood damage avoided, private flood control measures substituted

Market method - commercial fisheryMarket-based methods

Productivity change - soil formationHedonic pricing - majestic sceneryTravel cost - park visitsAvoided/replaced/substituted cost -

flood damage avoided, private flood control measures substituted

Methods for Discovering Value:

Discovering the WTP (willingness to pay)

Methods for Discovering Value:

Discovering the WTP (willingness to pay)

Contingent methods (hypothetical markets or choice situations)Contingent valuation method (CVM) - how

much people state they are willing to pay for ensuring the continued existence of a species they will experience

Contingent choice experiments (CCE) - choice scenarios of changes in environmental services with associated costs are asked

Benefit transfer method - adopting values revealed by studies of similar ecosystem services situations

Contingent methods (hypothetical markets or choice situations)Contingent valuation method (CVM) - how

much people state they are willing to pay for ensuring the continued existence of a species they will experience

Contingent choice experiments (CCE) - choice scenarios of changes in environmental services with associated costs are asked

Benefit transfer method - adopting values revealed by studies of similar ecosystem services situations

Sample Question in CVMSample Question in CVM

Would you connect your house to a public water distribution network or sewage treatment system if water quality would improve by ___? Yes No

If yes, how much would you be willing to pay for such services?

$ $ $ $ $ $ Over $

Would you connect your house to a public water distribution network or sewage treatment system if water quality would improve by ___? Yes No

If yes, how much would you be willing to pay for such services?

$ $ $ $ $ $ Over $

Sample Choices in CCESample Choices in CCE

Choice # Bus Ticket Price

Envi. Qlty. Along Route

Other Attribute

1 $10 Bad No seat

2 $20 Good W/ seat

Choice # Bus Ticket Price

Envi. Qlty. Along Route

Other Attribute

1 $10 Bad No seat

2 $30 Good W/ seat

Choice Questions: Choice Questions:

CVM for Non-Use Value Estimation

CVM for Non-Use Value Estimation

Strengths of CVMExcept possibly for the benefit

transfer method, other methods can not be applied

Can produce good estimates if the method is professionally applied

The logic of the method is easily understood and communicated to the public

Strengths of CVMExcept possibly for the benefit

transfer method, other methods can not be applied

Can produce good estimates if the method is professionally applied

The logic of the method is easily understood and communicated to the public

CVM for Non-Use Value Estimation

CVM for Non-Use Value Estimation

Weaknesses of CVMProne to value statement biasesMay produce inconsistent valuationProne to accuracy and reliability

challenges

Weaknesses of CVMProne to value statement biasesMay produce inconsistent valuationProne to accuracy and reliability

challenges

History of Legal Acceptability of CVM

History of Legal Acceptability of CVM

In 1986, Federal agencies began to include option, existence and bequest values measured by CVM for natural resource damage assessments.

In a 1988 challenge by industry reps, the District Court of Appeals ruled that the CVM was an appropriate method for existence value, and that existence value itself was intended by CERCLA (Comprehensive Environmental Response, Compensation and Liability Act).

NOAA Blue-Ribbon Panel concluded that CVM was a valid tool for discovering economic value in the Valdez Oil spill damages to wildlife habitat.

Inclusion in NOAA, EPA, USDA handbooks as part of their standard practice.

In 1986, Federal agencies began to include option, existence and bequest values measured by CVM for natural resource damage assessments.

In a 1988 challenge by industry reps, the District Court of Appeals ruled that the CVM was an appropriate method for existence value, and that existence value itself was intended by CERCLA (Comprehensive Environmental Response, Compensation and Liability Act).

NOAA Blue-Ribbon Panel concluded that CVM was a valid tool for discovering economic value in the Valdez Oil spill damages to wildlife habitat.

Inclusion in NOAA, EPA, USDA handbooks as part of their standard practice.

Case Study: Mono LakeCase Study: Mono Lake In the 1980s legal challenges to allocating

water by Ca. Water Resource Control Board from Mono Lake to Los Angeles that would impact the nesting and migratory birds around the lake.

A CVM was conducted in 1987 to discover the WTP of Ca. households to maintain water levels in Mono Lake to protect the birds.

An estimate of an average $156/year for every household led to a total WTP value of $1.3 billion, which was 50 x the $26 million cost of maintaining the water level.

In 1994, the Water Resource Control Board reduced by half the water rights of LA from Mono Lake to 50,000 from 100,000 acre-feet.

In the 1980s legal challenges to allocating water by Ca. Water Resource Control Board from Mono Lake to Los Angeles that would impact the nesting and migratory birds around the lake.

A CVM was conducted in 1987 to discover the WTP of Ca. households to maintain water levels in Mono Lake to protect the birds.

An estimate of an average $156/year for every household led to a total WTP value of $1.3 billion, which was 50 x the $26 million cost of maintaining the water level.

In 1994, the Water Resource Control Board reduced by half the water rights of LA from Mono Lake to 50,000 from 100,000 acre-feet.

Usefulness of Dual Prices in LP Models of Water

Resource Mgt.

Usefulness of Dual Prices in LP Models of Water

Resource Mgt. What is a Dual Price?Sometimes called shadow prices, they are the

prices of changing the level of a constraint (ex. water discharge level to protect a species) in an LP (linear programming) model.

A dual price is essentially a scarcity value, and is zero if the constraint is not binding.

However, if the constraint is binding, then a price is revealed and may be useful for imputing what the social value (WTP) may be if a non-use constraint is agreed upon and limits the use of the resource.

What is a Dual Price?Sometimes called shadow prices, they are the

prices of changing the level of a constraint (ex. water discharge level to protect a species) in an LP (linear programming) model.

A dual price is essentially a scarcity value, and is zero if the constraint is not binding.

However, if the constraint is binding, then a price is revealed and may be useful for imputing what the social value (WTP) may be if a non-use constraint is agreed upon and limits the use of the resource.

Usefulness of Dual Prices in LP Models of Water

Resource Mgt.

Usefulness of Dual Prices in LP Models of Water

Resource Mgt.Usefulness of Dual Price Info

LP models are commonly constructed for the efficient management of a resource with multi-purpose usages, such as a water resource.

Preferences on ecosystem non-use standards are often agreed upon by communities in non-monetary terms, which can be included as an additional constraint in such an existing model.

The change in the optimal pattern of usage because of this added constraint, and the change in the benefit value being optimized will reveal the social WTP through the dual price of the associated constraint.

Usefulness of Dual Price InfoLP models are commonly constructed for the

efficient management of a resource with multi-purpose usages, such as a water resource.

Preferences on ecosystem non-use standards are often agreed upon by communities in non-monetary terms, which can be included as an additional constraint in such an existing model.

The change in the optimal pattern of usage because of this added constraint, and the change in the benefit value being optimized will reveal the social WTP through the dual price of the associated constraint.

The Ticklish Issue of Discounting

The Ticklish Issue of Discounting

Why discount future values?Opportunity cost of capitalImpatienceRisk premium

We need a social discount rate to compare social preferences for future consumption over present consumptions of environmental and natural resources!

Why discount future values?Opportunity cost of capitalImpatienceRisk premium

We need a social discount rate to compare social preferences for future consumption over present consumptions of environmental and natural resources!

Relevance to the NBWARelevance to the NBWAEcosystem approach is necessary to properly

value uses that are due to system attributes.Non-use values are now being recognized by

stakeholders and becoming critical issues in policymaking in the management of ecosystems, such as in a watershed area.

There are acceptable and credible methods of valuation for these non-use values.

The NBWA should consider initiatives for using the CVM, benefit transfer, or even the dual prices of water resource LP models for discovering indirect and non-use values for a BCA analysis of their projects.

Ecosystem approach is necessary to properly value uses that are due to system attributes.

Non-use values are now being recognized by stakeholders and becoming critical issues in policymaking in the management of ecosystems, such as in a watershed area.

There are acceptable and credible methods of valuation for these non-use values.

The NBWA should consider initiatives for using the CVM, benefit transfer, or even the dual prices of water resource LP models for discovering indirect and non-use values for a BCA analysis of their projects.

Major ReferencesMajor References Arrow, Kenneth et al, “Report of the NOAA Panel on Contingent

Valuation”, Jan. 1993. Constanza, R. et al, “The Value of the World’s Ecosystem Services …”,

Nature Vol. 387, 1997. Goldberg, Jeffrey, “Economic Valuation of Watershed Systems …”, OAS

Dept. of Sustainable Development, 2007. Karousakis, K. and Koundouri, P., “Economic Valuation Methods for

Water Resource Management”, Arid Cluster, May 2005. King, Dennis and Mazzotta, Marissa, “Ecosystem Valuation”, NOAA and

USDA funded website www.ecosystemvaluation.org, developed 2000. Knight, Richard and Bates, Sarah eds., A New Century of Natural

Resource Management, Island Press, 1995. Lipton, Douglas et al. “Economic Valuation of Natural Resources: A

Guidebook…”, NOAA Coastal Ocean Program Decision Analysis Series #5, 1998.

Loomis, J., “Public Trust Doctrine…”, Journal of Soil and Water Conservation, June 1995.

Napa, Sonoma and Solano Counties, “Napa Salt Marsh Restoration”, Draft Feasibility Report, April 2003.

Shabman, L. and Stephenson, K., “Environmental Valuation …”, Visiting Scholar Program, US Army Corps of Engineers, 2007.

Arrow, Kenneth et al, “Report of the NOAA Panel on Contingent Valuation”, Jan. 1993.

Constanza, R. et al, “The Value of the World’s Ecosystem Services …”, Nature Vol. 387, 1997.

Goldberg, Jeffrey, “Economic Valuation of Watershed Systems …”, OAS Dept. of Sustainable Development, 2007.

Karousakis, K. and Koundouri, P., “Economic Valuation Methods for Water Resource Management”, Arid Cluster, May 2005.

King, Dennis and Mazzotta, Marissa, “Ecosystem Valuation”, NOAA and USDA funded website www.ecosystemvaluation.org, developed 2000.

Knight, Richard and Bates, Sarah eds., A New Century of Natural Resource Management, Island Press, 1995.

Lipton, Douglas et al. “Economic Valuation of Natural Resources: A Guidebook…”, NOAA Coastal Ocean Program Decision Analysis Series #5, 1998.

Loomis, J., “Public Trust Doctrine…”, Journal of Soil and Water Conservation, June 1995.

Napa, Sonoma and Solano Counties, “Napa Salt Marsh Restoration”, Draft Feasibility Report, April 2003.

Shabman, L. and Stephenson, K., “Environmental Valuation …”, Visiting Scholar Program, US Army Corps of Engineers, 2007.