The Value of the World’s Ecosystem Services and Natural Capital

1. The Value of the World’s Ecosystem Services and Natural Capital Robert Costanza et al.

2. Main message of article… • Services from the world’s ecosystems are worth a lot • Minimum of $16-54 trillion/yr (point estimate of $33 trillion/yr) • 1.8 times global GDP

3. … and reaction by economists • Toman (1998): “there is little that can usefully be done with a serious underestimate of infinity” • Smith (1997): “While the authors provide a litany of caveats, their results should not be used in any form—whether as measures of the importance of changes in natural resources to human welfare; as yardsticks for future project appraisals; or as sources of a road map for future research” • McConnell & Bockstael (2005): “an extreme example [of inappropriate valuation]—so extreme that one questions whether there could be a logically meaningfully way to answer the question they pose”

4. Why the harsh reaction? • Not because economists doubt that ecosystem services are important • Toman: “An economic assessment of ecosystem benefits and opportunity costs is one important element of the information set that must go into social decision making” • McConnell & Bockstael: “it is especially important to document the value of ecosystem services to human well-being as these contributions are critical but often unappreciated because they are indirect and often obscure”

5. Rather: • Criticisms of study’s scientific validity and policy value • Decision by Nature not to print follow-up correspondence (despite stated desire by Costanza et al. to “stimulate additional research and debate”)

6. What’s your reaction?

7. Arguments against valuation

8. Arguments against valuation • “impossible or unwise … cannot place a value on such ‘intangibles’ as human life, environmental aesthetics, or long-term ecological benefits”

9. Arguments against valuation • “impossible or unwise … cannot place a value on such ‘intangibles’ as human life, environmental aesthetics, or long-term ecological benefits” • Costanza et al.: “we do so every day” (construction standards); “we can choose to make these valuations explicit or not”

10. Arguments against valuation • “impossible or unwise … cannot place a value on such ‘intangibles’ as human life, environmental aesthetics, or long-term ecological benefits” • Costanza et al.: “we do so every day” (construction standards); “we can choose to make these valuations explicit or not” • “we should [protect ecosystems] for purely moral or aesthetic reasons”

11. Arguments against valuation • “impossible or unwise … cannot place a value on such ‘intangibles’ as human life, environmental aesthetics, or long-term ecological benefits” • Costanza et al.: “we do so every day” (construction standards); “we can choose to make these valuations explicit or not” • “we should [protect ecosystems] for purely moral or aesthetic reasons” • Costanza et al.: “there are equally compelling moral arguments that may be in direct conflict with the moral argument to protect ecosystems” (no one should go hungry); moral arguments make “choice more difficult and less explicit” but should go on in parallel with economic arguments

12. What are the steps in their study?

13. What are the steps in their study? • Classify ecosystem services into 17 categories (Table 1)

15. What are the steps in their study? • Classify ecosystem services into 17 categories (Table 1) • Classify earth’s surface (marine and terrestrial) into 16 primary ecosystems • Obtain valuation estimates from literature (> 100 studies) • Construct unit values by dividing each estimate by the area of the ecosystem valued • Multiply the area of the ecosystems by the corresponding unit values, and add up (Table 2)

17. Costanza et al. claim that resulting estimate is an underestimate: why?

18. Costanza et al. claim that resulting estimate is an underestimate: why? • Various reasons, including: • Omit some services (atmosphere) • Omit some ecosystems (desert, tundra, ice/rock, cropland)

19. What valuation measures do they use?

20. What valuation measures do they use? • Where possible, total social surplus (consumer plus producer surplus) • If not, producer surplus (“net rent”) • If not that, revenue (price times quantity)

21. Can global WTP > global GDP?

22. Can global WTP > global GDP? • According to Costanza et al., yes: because of consumer surplus

23. Do they think marginal analysis—valuing changes—is important?

24. Do they think marginal analysis—valuing changes—is important? • p. 255: “it is not very meaningful to ask the total value of natural capital to human welfare …. Their value is infinite in total.” • Instead of valuing natural capital, they value flows of services from this capital • 3rd sentence: “The economies of the Earth would grind to a halt without the services of ecological life-support systems, so in one sense their total value to the economy is infinite. However, it can be instructive to estimate the ‘incremental’ or ‘marginal’ value of ecosystem services (the estimated rate of change of value compared with changes in ecosystem services from their current levels).”

25. Why is their analysis not a marginal analysis?

26. Why is their analysis not a marginal analysis? • Fail to specify the change they are analyzing: what is their “thought experiment” (treatment vs. control)? • Cf. theory: E0 E1 • Cf. applied studies: Hodgson & Dixon, Suthawan & Barbier

27. Improper aggregation • If experiment is total elimination of world’s ecosystems, then by author’s own admission no need to do valuation study

28. Improper aggregation • If experiment is total elimination of world’s ecosystems, then by author’s own admission no need to do valuation study • Underlying studies did not all consider total elimination of ecosystems studied

29. Improper aggregation • If experiment is total elimination of world’s ecosystems, then by author’s own admission no need to do valuation study • Underlying studies did not all consider total elimination of ecosystems studied • Even if they did, sum of WTP across individual environmental changes  WTP for a package of changes • Former involves ceteris paribus assumption: income, prices, all other ecosystem services remain constant • WTP can exceed revenue for an individual good, but not for all goods collectively •  upward bias in Costanza et al.’s global estimate • Eliminating the world’s ecosystems is not a marginal change!

30. Costanza et al.: Divide shaded area by q Yields average value (large) Upward bias Marginal analysis Measure shaded area created by unit shift in supply curve Yields marginal value (smaller) 3. Average values  Marginal values

31. Toman: “Is the ‘value of everything’ valuable?”

32. Toman: “Is the ‘value of everything’ valuable?” • No, because it ignores tradeoffs • “One particular danger of this simple calculation is that it could suggest to some decision makers that all aspects of nature in all places warrant the same level of safeguarding.” • “So long as priorities must be set among competing claims for ecosystem protection and/or amelioration, it is necessary to understand how specific changes in different ecosystem states are affecting social interests and value. One needs a specified baseline, a specified measure of changes, and a set of criteria for evaluating and comparing these changes.” • Heal’s critique of valuation