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Environmental Valuation and its Applications

Environmental Valuation and its Applications. Joshua Farley Community Development and Applied Economics Gund Institute for Ecological Economics University of Vermont. T he Problem. Finite planet subject to laws of thermodynamics… Can’t make something from nothing

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Environmental Valuation and its Applications

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  1. Environmental Valuation and its Applications Joshua Farley Community Development and Applied Economics Gund Institute for Ecological Economics University of Vermont

  2. The Problem • Finite planet subject to laws of thermodynamics… • Can’t make something from nothing • Energy, required for all production • Raw materials, required for all economic production, essential to human survival • And laws of ecology… • Raw materials are structural building blocks of ecosystems • Loss of structure + pollution = loss of life support functions and other services, essential for survival of all species

  3. The Problem • Result is serious biophysical threats to human welfare and survival • Climate change and other forms of pollution • Natural resource depletion • Loss of biodiversity and ecosystem services • Laws of economics • When the marginal costs of an activity exceed the benefits, halt the activity • Market fails to measure all costs and benefits

  4. The Question • Can monetary valuation of the environment help us balance marginal costs and marginal benefits? • We must truly understand the function of prices/value to answer this question

  5. Outline • Function of prices in a market economy and associated problems • Issues with monetary valuation of non-markets goods and services • When and how should we apply valuation? • Conclusions

  6. Function of Prices in a Market Economy A Critical Perspective

  7. Functions of prices • Measure value • Maximize monetary value • Allocation function • Rationing function • Measure scarcity • Accounting (briefly)

  8. Prices as a Measure of Value • Do Prices Reflect Value? • Diamond water paradox • Use value vs. exchange value • Exchange value = marginal value = price

  9. Allocative function of price • Apportions factors of production to whatever industry is willing to pay the most • Generally the industry that can create most monetary value • Maximizes monetary value across producers

  10. Rationing function of price • Apportions market products to whoever is willing to pay the most • Maximizes monetary value across consumers • Value is preferences weighted by purchasing power • One dollar, one vote

  11. Do Prices Always Maximize Monetary Value? • Non-rival resource: use by one person does not leave less for others to use • Rationing is inefficient • Example of HCFCs and ozone hole • Optimal price is zero • Many ecosystem services are non-rival

  12. Is Monetary Value what we want to Maximize? • Eflornithine: Perverse outcomes? • What’s worth more, a tank full of ethanol for a fat American, or a plate full of tortillas for starving Mexicans? • Tyranny of the rich? • One dollar one vote or one person one vote?

  13. Price as measure of scarcity • Scarcity  price increase  efficiency and innovation • Does this even work for market goods?

  14. Prices and Accounting • Monetary value of food and energy as supplies contract • Health care and GNP

  15. Conventional Economists: Missing the point…. • Schelling (Nobel Memorial Prize in 2005): “Agriculture and Forestry are less than 3% of total output, and little else is much affected. Even if agricultural productivity declined by a third over the next half century, the per capita GNP we might have achieved by 2050 we would still achieve in 2051.”

  16. Issues with Valuation of Environmental Resources

  17. 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

  18. Incommensurability • Not all things can be measured in same units • How much for your daughter?

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

  20. Essential and Non-substitutable Benefits • Small changes in quantity lead to large changes in value • Unless system is static, by the time valuation studies are published, fed to decision makers and integrated into policy, they are wrong

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

  22. 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

  23. The Demand Curve for Natural Capital

  24. 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

  25. Add value to cost of conversion (e.g. tax)

  26. 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

  27. Price Conservation needs

  28. 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?

  29. 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

  30. 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

  31. 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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