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Environmental Valuation: Balancing Economic Decisions for Sustainability

This project explores the use of monetary valuation to balance marginal costs and benefits in economic decisions. It covers conventional valuation methods, current applications like cost-benefit analysis, and the demand curve for critical natural capital. The study discusses how environmental valuation can guide policy decisions, impact national accounts, and highlight ecological thresholds. By examining the integration of economics and ecology, the project aims to reveal the critical importance of conservation and sustainability for future generations.

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Environmental Valuation: Balancing Economic Decisions for Sustainability

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  1. Project update • Each step builds on the previous step • Your problem statement uses your literature review to tell a story. The story will conclude with your goals. Objectives are the steps you take to achieve your goals. Methods explain how you will achieve your objectives.

  2. Environmental Valuation

  3. The Question • Can monetary valuation of the environment help us balance marginal costs and marginal benefits of economic decisions? • Can it help us solve the macroallocation problem?

  4. Functions of prices • Measure value • Maximize monetary value • Allocation function • Rationing function • Does it work? Non-rival goods • Is it what we want? • Measure scarcity • Accounting

  5. Conventional Valuation Methods • Direct market value • Indirect market value • Avoided cost • Replacement cost • Factor income • Travel cost • Hedonic pricing • Contingent valuation • WTP • WTA • Loss aversion

  6. Current Applications • Cost Benefit Analysis • Internalizing externalities (e.g. green taxes, assurance bonds, etc.) • Policy decisions (e.g. climate change, biodiversity loss) • Regulatory choices (e.g. leaded gasoline) • Expenditure decisions • Damage assessments • National accounts • Calling attention to the problem

  7. What is CBA? • Can the winners potentially compensate the losers? • Potential Pareto Optimality

  8. Discounting • How do we deal with future values (costs and benefits)? • Opportunity cost • Pure time preference • Richer future • Uncertainty

  9. Incommensurability • Can all things can be measured in same units? • How much for your daughter?

  10. Uncertainty, Ignorance, Irreversibility and Complexity • Emergent phenomena, surprises, thresholds • Amazon, rainfall and the Cerrado • Mata Atlantica, habitat loss, extinction and time lags • Monetary values can be no more accurate than ecological knowledge

  11. Future Generations • Cannot possibly bid in today’s markets • Monetary valuation assumes they have no rights.

  12. When and How do we Apply Valuation? The Case of Critical Natural Capital

  13. Critical Natural Capital • Components of natural capital that are essential to human survival and for which there are no adequate substitutes • Ecological thresholds • Interdependent elements of complex system

  14. The Demand Curve for Natural Capital

  15. Region 1 • E.g. forests in Vermont • Price can determine conservation needs • Estimate monetary value, provide information to decision makers, feed into market price (e.g. green taxes) • Only appropriate when rate of change in value is slow, i.e. region I • Far from threshold, errors not that important

  16. Region II • Estimated price very sensitive to errors • Let knowledge of thresholds and other ecological criteria determine conservation needs • Conservation needs then determine price • Prices adjust to conservation constraints much more rapidly than ecosystems adjust to prices. • E.g. laws (unenforced) limiting deforestation in Amazon • International incentives essential

  17. Region III • Restoration is essential • E.g. Atlantic Forest • Time lags give us limited time to act • Economists should focus on supply curve, not demand curve • What is most cost effective way to restore critical natural capital?

  18. Region III • Finance more important than valuation • Must combine polluter pays principle, beneficiary pays principle • Trace flows of damages and benefits • Wealthy countries must finance provision of global public good benefits, pay for costs of global climate change • ICMS ecologico good model

  19. Integrative, applied methods • What is the value of salmon in the Puget Sound • ARIES http://www.youtube.com/watch?v=5yHnUTPADMw

  20. Conclusions • Worst approach is to assign no value to environment • Environmental valuation can help determine when conservation is needed • Calls attention to problem • Can help in allocation when ecosystems are healthy, resilient • Economic values never better than ecological knowledge—close collaboration essential

  21. Conclusions • For stressed systems, conservation needs must determine environmental values • Economics take back seat to ecology • Many, many systems are stressed • Global effort required to protect globally interconnected ecosystems • Beneficiary countries should pay provider countries • Ecologists/life scientists must educate economists on thresholds, criticality of natural capital

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