Valuing ecosystem services-advantages and disadvantages of

existing methodologies and application to PES

Danièle Perrot-Maître

Seminar on environmental services and financing for the protection and sustainable use of ecosystems

Geneva, 10-11 October 2005

Outline of presentation

• Ecosystem goods and services• Reasons to value ecosystem goods and

services• Valuation methods: definition, examples,

advantages and disadvantages• Applying valuation to PES design• Key messages

Ecosystems products and services

Products

• Food• Fuel wood • Non-timber forest products • Fisheries products • Marine products• Wetlands products• Medicinal and biomedical products • Forage and agricultural products• Water • Reeds• Building material

Functions/Services

Hydrological services• Purification of water• Capture, storage and release of surface and

groundwater• Mitigation of floods and droughts

Biodiversity• Maintenance of biodiversity (plants and

animals)

Climate• Partial stabilization of climate through carbon

sequestration• Moderation of temperature extremes and the

force of winds and waves

Source: Adapted from Simpson (2001)

Existence valuesIntrinsic value of resources and landscapes,

irrespective of its use such as cultural, aesthetic, bequest significance, etc.

Direct valuesOutputs that can be consumed or processed

directly, such as timber, fodder, fuel, non-timber forest products, meat, medicines, wild foods, etc.

Indirect valuesEcological services, such as flood control,

regulation of water flows and supplies, nutrient retention, climate regulation, etc.

Option valuesPremium placed on maintaining resources and

landscapes for future possible direct and indirect uses, some of which may not be known now.

USE VALUES

NON-USE VALUES

Why value? • Understand how much an ecosystem contributes to economic

activity or society. For example, on average forests benefits in the Med region amount to about 1% of GDP. Indirect use value such as watershed protection contributes about 35% of total estimated value.

• Understand what are the benefits and costs of an intervention that alters the ecosystem (conservation investment, development project, regulation or incentive) and make ecosystem gods and services comparable with other investments

• How are costs and benefits of a change in ecosystem distributed?

• How to make conservation financially sustainable?

Surrogate Market

Approaches

TravelCosts

HedonicPricing

Effect on Production

Productivity Approach

Replacement Costs

Cost of providing substitute services

Damage cost avoided

Market Price Method

MarketPrices

Contingent Valuation

Conjoint Analysis

Choice Experiments

Cost-Based

Methods

RevealedPreferenceMethods

Stated Preference Methods

Market PricesDirect valuesGoods and products

Indirect valuesEcosystem services

Option valuesExistence values

Direct valuesNature tourism

Effect on Production

Replacement Costs

Cost of Providing Substitutes

Cost of Avoided Damage

Productivity &cost-based approaches

Travel Costs

Contingent Valuation

Surrogate market & stated preference approaches

Surrogate Market

Approaches

TravelCosts

HedonicPricing

Effect on Production

Production Function

Approaches

Replacement Costs

Cost pf providing substitute Services

Damage Cost Avoided

Market Prices

MarketPrices

Contingent Valuation

Conjoint Analysis

Choice Experiments

Cost-Based

Methods

RevealedPreferenceMethods

Stated Preference Methods

MARKET PRICES

What it costs to buy or sell a good or

productPeople’s actual

willingness to pay

E.g. Nam Et & Phou Loei NBCA, Lao PDR:Value of NTFP use for Viengthong District villages

Cash income $634,000 Plant foods $45,000 Wild meats $476,000 Fuel and housing $480,000 Crop consumption $241,000

TOTAL VALUE $1,876,000

Advantages and Limitations of the Market Price Method

+ Use if primary resource or ecosystem affected has a commercial market (for ex. benefits of cleanup and closure of commercial fishing on fisheries). Prices, quantities and cost are easy to obtain.

+ The method uses observed data of actual preferences

+ The method uses standard, accepted economic techniques (consumer and producer surplus based on supply and demand curves) and is relatively easy to apply

– Seasonal variations and other effects on price have to be considered

– Usually the costs of transport to bring goods to the markets not included and benefits may be overstated

– Many ecosystem goods and services do not have markets or markets are distorted or not well developed and market prices do not always fully reflect the value of ecosystem services to society (WTP)

PRODUCTIVITY METHOD

The economic contribution of

ecosystems to other production and consumption

activitiesMarket value as an

input

Flood attenuation benefits from forests, MadagascarValue of flood damage to paddy production

NPV for forest watershed protection benefits: $126,700.

Resulted in the establishment ofMantadia NP

Advantages and Limitations of the Productivity Method

+ Methodology straightforward, data requirements are limited and relevant data may be readily available hence methiod relatively inexpensive to apply

– Only resources and services that are marketed can be valued

– Most difficult aspect is to be able to quantify the biophysical relationship that link changes in supply or quality of ecosystem services with environmental changes or management options. Often use simplified assumptions.

– If changes in ecosystem affects market price, then the method is more complicated and difficult to apply

– If changes are too drastic, users of ecosystem goods and services may switch to other alternatives.

TRAVEL COSTS

How much people spend to use or

benefit from using ecosystems for

recreational purposesPeople’s implied

willingness to pay

USA, Value impacts of improved environmental quality on freshwater recreation in the US

Combined benefit of all freshwater-basedrecreation: $37 billion/year

Advantages and Limitations of the Travel Cost Method

+ Limited to recreational values

– Requires complex statistical analysis, large and complex data sets, hence expensive and time consuming

– Likely to estimate value of one factor because difficult to separate out effect of different factors (lansdcape beauty and water)

REPLACEMENT COSTS

The costs of replacing an environmental good or service

A minimum estimate of money saved

E.g. Ream National Park, Cambodia:Value of mangrove ecological services (flood barriers, upstream erosion control)

Storm protection $60,000 Silt trapping $220,000

TOTAL VALUE $280,000

COSTS OF MITIGATING ECOSYSTEM DEGRADATION

The costs of mitigating or averting the effects of the loss of an environmental

good or serviceA minimum

estimate of money saved

E.g. Thua Thien Hue, Vietnam:Value of watershed catchment protection for urban and rural water supplies (Infrastructure to mitigate erosion, seasonal low water supplies and flooding)

Investment costs $27 million Recurrent costs $1.8 million

ANNUAL COST $2.88 million

DAMAGE COSTS AVOIDED

The costs avoided from the destruction

of ecosystemA minimum

estimate of money saved

E.g. Value of Phnom Bokor NP for watershed protection and hydropower generation

Failure to invest in watershed management as a component of dam maintenance could incur NPC of over $2million in terms of power revenues foregone

Advantages of Cost-Based Methods

+ Particularly useful for valuing ecosystem services

+ Simple to apply and analyse (rely on 2dary data on benefits from ecosystem services and cost of alternative). Easier to measure costs of producing benefits than the benefits themselves when goods and services are not marketed.

+ Particularly useful if time and financial resources for the study are elimited or where it is not possible to carry out detailed surveys

+ Approaches are less data and resource intensive whereas data or budget limitations may rule out valuation methods that estimate WTP

Limitations of Cost-Based Methods– Provide only rough indicator of ecosystem value

– Replacement cost: often difficult to find perfect replacements for ecosystems goods and services, hence valuation results tend to undervalue ecosystem value

– Mitigation expenditures: often people’s perception of the effect of ecosystem loss and what would be required to mitigate these effects do not always match those of experts.

– Damage cost method: estimated damages avoided remain hypothetical in most cases. Often difficult to relate damages to changes in ecosystems

CONTINGENT VALUATIONThe amount people would pay/accept

under the theoretical condition that

biodiversity could be bought and soldPeople’s stated

willingness to pay

E.g. Doi Inthanon and Suthep Pui National Parks, Thailand:Willingness to pay for park entry fees

Doi Inthanon 40 Baht per person Suthep Pui 20 Baht per person

TOTAL VALUE $1.2 million/year

Advantages of CV+ Very flexible. Can be used to estimate economic

value of about anything but best to use it to estimate value of goods and services easily identified and understood by users

+ CV is the most widely accepted method for estimating TEV including non use, option and bequest values (only method to estimate option or existence values)

+ CV has been widely used and a great deal of research is being conducted to improve the methodology, make results more valid and reliable and understand strengths and limitations

Limitations of CV– Whether CV really measures WTP still controversial (most

people unfamiliar making choices about ecosystem services)

– Results highly sensitive to design of choice scenarios and how survey conducted (psychological aspects)

– WTP sensitive to payment vehicle (WTA compensation)

– Strategic bias to influence outcome

– Non response bias

– Many people including jurists, policy makers, economists and others do not believe the results of CV analysis

LESS COMMON METHODS

HedonicPricing

Conjoint Analysis

Choice Experiments

Difference in (property or wage) prices that can be ascribed to the existence or level of nearby environmental goods and services.

Obtains information on preferences between various alternatives of environmental goods and services, at different price or cost.

Present a series of alternative resource or use options, each of which are defined by various attributes including price.

Application of economic valuation to PES design

Watershed services: supply and demandSupply of services:Upstream land uses affect the Quantity, Quality, and Timing of water flows

Demand for services:Possible downstream

beneficiaries:• Domestic water use• Irrigated agriculture• Hydroelectric power• Fisheries• Recreation• Downstream ecosystems

Source: World Bank 2003

Applying ecosystem valuation to payment for ecosystem service: simple in theory

Benefits to producers

Costs to offsite populations

Conventional resource use:

no conservation

Conservation with payment

for service

Payment

Conservation without

paymentMinimum payment willing to receive to change damaging behaviour to ecosystem

Maximum paymentwilling to pay to reduceenvironmental damage

Source: Adapted from World Bank 2002

In practice, not so simple…

In practice not so simple…

Complex biophysical linkages (Brand 2003)

In practice still not so simple…valuing effects of change in ecosystem conditions on agricultural production

Impact on ecological function & service

Physical impact of change in functions

Socio-economic effects of physical impact

Overall impact of Socio-economic effects

Intervention

Reduction in water: floods & drought

Increased erosion

Increase in crop damage (in kg)

Decrease in crop yield (in US$)

Increase use fertiliser & pesticides (in kg)

Increase productioncosts (in US$)

Increase in crop production (in kg)

Increase in crop yield (in US$)

Reduction of forest cover

Reduced pest-control &

pollination

DeforestationChange in Economic Value of Agriculture

(in US$)

Impact on ecological function & service

Physical impact of change in functions

Socio-economic effects of physical impact

Overall impact of Socio-economic effects

Intervention

Reduction in water: floods & drought

Increased erosion

Increase in crop damage (in kg)

Decrease in crop yield (in US$)

Increase use fertiliser & pesticides (in kg)

Increase productioncosts (in US$)

Increase in crop production (in kg)

Increase in crop yield (in US$)

Reduction of forest cover

Reduced pest-control &

pollination

DeforestationChange in Economic Value of Agriculture

(in US$)

Use-and non use- of economic valuation to design payments for ecosystem services

Public payments

• Costa Rica: $20-44/ha/yr for forest conservation- based on old subsidy based on opportunity cost of land use change

• USA (Conservation Reserve Program): $50/ha/yr. Opportunity cost and cost of conservation measures

• Ecuador: municipal water and electrical utility companies each donate 1% of total revenues for watershed protaction (oroginally 5% had been proposed by TNC)

• Brazil – a water utility in the city of Sao Paulo pays 1% of total revenues ($2,500 per month) for the restoration and conservation of the Corumbatai watershed. Funds are used to establish tree nurseries and for reforestation along riverbanks. Payment is outcoem of political negotiation.

Use-and non use- of economic valuation to design payments for ecosystem services

Private payments

• France: US$320/ha/year for 7 years, equivalent to 75% of farm income Opportunity cost and actual cost of switching agricultural technology

• Costa Rica: a hydropower company pays US$10 per ha/year to a local conservation NGO for hydrological services in the Peñas Blancas watershed

• Australia: Since 1999, farmers in the Murray Darling watershed pay $AUD 85/ha/yr for forest conservation for 10 years or $AUD 17 per million liters of transpired water. Based on increase in marginal benefits due to reduced soil salinity resulting of 100 ha of reforested area.

Concluding remarks

Applicability and limitations of economic valuation

• Economic valuation highlights costs and benefits and cost bearers and beneficiaries that in the past have been ignored

• But for policy makers it may not, and probably will not be, the most important factor. Ecosystem valuation only provides a set of tools with which to make better and more informed decisions and is not a stand alone exercise.

• Valuation is out of necessity partial. Case studies underestimate ecosystem values at larger scale because the larger scale the more difficult it is to replace the ecosystem goods and services and interactions are too complex to understand impacts of alternatives .

• Some ecosystems will never be measurable or quantifiable because we do not have the necessary scientific, technical or economic data.

Applicability and limitations of economic valuation

• When ecosystem benefits that relate to attributes such as human life, cultural or religious significance, economic valuation raises serious ethical questions. Ecosystem valuation may be dangerous when it focuses only on financial or cash benefits at the expense of other types of values that cannot-or should not-be valued.

• Results of ecosystem valuation studies are not definitive, and transferable between groups and locations. They are generally based on the perception of a particular group at one point in time and is not universally valid.

• There is no garantee that the findings of economic valuation will support the wise use and management of ecosystems and their services. In fact the use of valuation studies to identify and promote new ways of capturing ecosystem values through markets or PES, can be a double-edged sword.

Key Messages

• It is easy to spend tons of money on valuation.

• It is easy to value everything, yet the results of valuation are not always useful or correct.

• Info on total benefit flows, even if correct, cannot provide guidance on specific conservation decisions which are about making incremental changes in these flows.

More key messages

• 1st. step: ask yourself what is the purpose of the analysis, who should take its results into account

• 2nd. step: what is your budget, can it be adjusted, what capacity is available, which time frame?

• 3rd. step: which process? Process may be as important as the result. Consider stakeholders, including policy makers, participation into the study.

And more…• In designing PES, the most appropriate method to

value an ecosystem service is the production function analysis-yet it is rarely done

• Be pragmatic, learn and adapt: most payments based on OC to service provided, not on marginal benefit to beneficiary. Payments need not be cast in stone but adapted as more is learned about the system, especially biophysical relationships.

• Economic valuation will only address equity issue if this is designed into the valuation study from the start. Hence back to step 1!

For further information: IUCN For further information: IUCN economic valuation productseconomic valuation products

Working Papers & Policy Briefs

Toolkit

Case Studies

For further information

Toolkit downloadable from:

http://www.waterandnature.org/value/

New revamped website: http://biodiversityeconomics.org

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