Valuing ecosystem services-advantages and disadvantages of existing methodologies and application to PES

1. 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

2. 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 Outline of presentation

3. 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) Ecosystems products and services

4. 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. USE VALUES Option valuesPremium placed on maintaining resources and landscapes for future possible direct and indirect uses, some of which may not be known now. Existence values Intrinsic value of resources and landscapes, irrespective of its use such as cultural, aesthetic, bequest significance, etc. NON-USE VALUES

5. 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? Why value?

6. RevealedPreference Methods Cost-Based Methods Stated Preference Methods Market Price Method Productivity Approach Surrogate Market Approaches MarketPrices Effect on Production Travel Costs Replacement Costs Contingent Valuation Cost of providing substitute services Conjoint Analysis HedonicPricing Choice Experiments Damage cost avoided

7. Direct values Market Prices Goods and products Productivity &cost-based approaches Indirect values Effect on Production Replacement Costs Ecosystem services Cost of Providing Substitutes Cost of Avoided Damage Option values Surrogate market & stated preference approaches Existence values Travel Costs Direct values Contingent Valuation Nature tourism

8. RevealedPreferenceMethods Cost-Based Methods Stated Preference Methods Market Prices Production Function Approaches Surrogate Market Approaches MarketPrices Effect on Production Travel Costs Replacement Costs Contingent Valuation Cost pf providing substitute Services Conjoint Analysis HedonicPricing Choice Experiments Damage Cost Avoided

9. 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 MARKET PRICES What it costs to buy or sell a good or product People’s actual willingness to pay

10. 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) Advantages and Limitations of the Market Price Method

11. 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 PRODUCTIVITY METHOD The economic contribution of ecosystems to other production and consumption activities Market value as an input

12. 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. Advantages and Limitations of the Productivity Method

13. USA, Value impacts of improved environmental quality on freshwater recreation in the US Combined benefit of all freshwater-based recreation: $37 billion/year TRAVEL COSTS How much people spend to use or benefit from using ecosystems for recreational purposes People’s impliedwillingness to pay

14. 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) Advantages and Limitations of the Travel Cost Method

15. 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 REPLACEMENT COSTS The costs of replacing an environmental good or serviceA minimum estimate of money saved

16. COSTS OF MITIGATING ECOSYSTEM DEGRADATION 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 The costs of mitigating or averting the effects of the loss of an environmental good or service A minimum estimate of money saved

17. 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 DAMAGE COSTS AVOIDED The costs avoided from the destruction of ecosystemA minimum estimate of money saved

18. 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 Advantages of Cost-Based Methods

19. 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 Limitations of Cost-Based Methods

20. 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 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

21. 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 Advantages of CV

22. 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 Limitations of CV

23. HedonicPricing Conjoint Analysis Choice Experiments LESS COMMON METHODS 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 environmentalgoods 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.

24. Application of economic valuation to PES design

25. 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

26. Conservation with payment for service Payment Applying ecosystem valuation to payment for ecosystem service: simple in theory Conservation without payment Conventional resource use: no conservation Minimum payment willing to receive to change damaging behaviour to ecosystem Benefits to producers Costs to offsite populations Maximum payment willing to pay to reduce environmental damage Source: Adapted from World Bank 2002

27. In practice, not so simple…

28. In practice not so simple…Complex biophysical linkages(Brand 2003)

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

30. 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

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

32. Concluding remarks

33. 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

34. 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. Applicability and limitations of economic valuation

35. 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. Key Messages

36. 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. More key messages

37. 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! And more…

38. For further information: IUCN economic valuation products Toolkit Working Papers & Policy Briefs Case Studies

39. Toolkit downloadable from: http://www.waterandnature.org/value/ New revamped website: http://biodiversityeconomics.org For further information

40. Thank you!