Valuing ecosystem servicesadvantages 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
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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)
Direct values
Outputs that can be consumed or processed
directly, such as timber, fodder, fuel, non-timber
forest products, meat, medicines, wild foods, etc.
USE
VALUES
Indirect values
Ecological services, such as flood control,
regulation of water flows and supplies, nutrient
retention, climate regulation, etc.
Option values
Premium placed on maintaining resources and
landscapes for future possible direct and indirect
uses, some of which may not be known now.
NON-USE
VALUES
Existence values
Intrinsic value of resources and landscapes,
irrespective of its use such as cultural, aesthetic,
bequest significance, etc.
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?
Revealed
Preference
Methods
CostBased
Methods
Stated
Preference
Methods
Replacement
Costs
Contingent
Valuation
Surrogate
Market Price Productivity
Market
Method
Approach
Approaches
Market
Prices
Effect on
Production
Travel
Costs
Hedonic
Pricing
Cost of
providing
substitute
services
Damage cost
avoided
Conjoint
Analysis
Choice
Experiments
Direct values
Goods and products
Market Prices
Productivity &
cost-based approaches
Indirect values
Ecosystem services
Effect on Production
Replacement Costs
Cost of Providing
Substitutes
Cost of Avoided
Damage
Option values
Existence values
Surrogate market & stated
preference approaches
Direct values
Travel Costs
Nature tourism
Contingent Valuation
Revealed
Preference
Methods
Market
Prices
Market
Prices
CostBased
Methods
Stated
Preference
Methods
Travel
Costs
Replacement
Costs
Contingent
Valuation
Hedonic
Pricing
Cost pf
providing
substitute
Services
Conjoint
Analysis
Production Surrogate
Function
Market
Approaches Approaches
Effect on
Production
Damage Cost
Avoided
Choice
Experiments
MARKET PRICES
What it costs to buy
or sell a good or
product
People’s actual
willingness to pay
E.g. Nam Et & Phou Loei
NBCA, Lao PDR:
Value of NTFP use for
Viengthong District villages
Cash income
Plant foods
Wild meats
Fuel and housing
Crop consumption
$634,000
$45,000
$476,000
$480,000
$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
activities
Market value as an
input
Flood attenuation benefits
from forests, Madagascar
Value of flood damage to paddy
production
NPV for forest watershed protection
benefits: $126,700.
Resulted in the establishment of
Mantadia 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 purposes
People’s implied
willingness to pay
USA, Value impacts of improved
environmental quality on
freshwater recreation in the US
Combined benefit of all freshwater-based
recreation: $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
Silt trapping
$60,000
$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 service
A 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
Recurrent costs
$27 million
$1.8 million
ANNUAL COST
$2.88 million
DAMAGE COSTS AVOIDED
The costs avoided
from the destruction
of ecosystem
A 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 VALUATION
The amount people
would pay/accept
under the theoretical
condition that
biodiversity could be
bought and sold
People’s stated
willingness to pay
E.g. Doi Inthanon and Suthep
Pui National Parks, Thailand:
Willingness to pay for park
entry fees
Doi Inthanon
Suthep Pui
40 Baht per person
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
Hedonic
Pricing
Difference in (property or wage) prices that
can be ascribed to the existence or level of
nearby environmental goods and services.
Conjoint
Analysis
Obtains information on preferences between
various alternatives of environmental goods
and services, at different price or cost.
Choice
Experiments
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 demand
Supply 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
Conventional
resource use:
no
conservation
Conservation
without
payment
Minimum payment
willing to receive to
change damaging
behaviour to
ecosystem
Conservation
with payment
for service
Payment
Benefits to
producers
Costs to
offsite
populations
Maximum payment
willing to pay to reduce
environmental 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
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
economic valuation products
Toolkit
Case Studies
Working Papers
& Policy Briefs
For further information
Toolkit downloadable from:
http://www.waterandnature.org/value/
New revamped website:
http://biodiversityeconomics.org
Thank you!