2 April, InVEST Introductory Seminar, Bangkok Valuation Emily McKenzie 2 April, InVEST Introductory Seminar, Bangkok

“Almost all economists are intellectually committed to the idea that things people want can be valued in dollars and cents… Most environmentalists not only disagree with this idea, they find it morally deplorable… Yet, the fact remains that difficult choices must be made.” (Economist, 2002)

Moratorium on dredging in RMI Source: McKenzie et al. 2006 Damage costs of near-shore dredging in terms of coastal protection losses were estimated at US$52 per m3. This was much higher than the US$36 per m3 off-shore.

Outline Concept of valuation Reasons people use valuation Methods that are commonly used NatCap approach to valuation

Valuation Ecosystem services are scarce and valuable Often no markets or prices exist for ecosystem services Valuation makes value of environment explicit Valuation techniques based on human decisions Requires biophysical modeling

Examples Nature supports livelihoods and economies in countless ways. Biosphere worth US$33 trillion/year Costanza et al. 2007 Mangroves worth more than shrimp farms Barbier 2007

Another Example Nature supports livelihoods and economies in countless ways. loss of public & private property ($) avoided damage to property ($)

Why Value ES? To assess the value of the total flow of benefits from ecosystems; To evaluate the net benefits of an intervention that alters ecosystem conditions; To determine how the costs and benefits of ecosystem conservation are distributed; and To identify beneficiaries to ascertain potential funding sources for conservation. Pagiola, von Ritter & Bishop 2004

Financial costs (in $) Environmental & social benefits (in $) benefits (revenues) (in $) Environmental & social benefits (in $) Financial costs (in $) benefits (revenues) (in $)

What is valuation? Assessing the economic value of ecosystem services. This can be a $ amount or another type of metric Price ≠ value

Value of ecosystem services In economics, value is defined as welfare (wellbeing). ‡ price Value of ecosystem services depends on human welfare derived from nature. Welfare is traditionally measured in terms of currency The substitution between money and the quantity/quality of ecosystem services can be expressed as willingness to pay (WTP) or willingness to accept (WTA) compensation Structures Values Services Functions

Total economic value Total Economic Value Use value Non-use value Direct use value Indirect use value Option value Existence value Example: Timber Recreation Example: Water purification Carbon sequestration Example: Soil fertility Biodiversity Example: Rare species Pagiola et al, 2004

Use Values in TEV Direct Use Value: Value from direct human use of natural resources. Extractive Use Value e.g. timber, fisheries Non-Extractive Use Value e.g. recreation, tourism, education Indirect Use Value: Ecological functions that indirectly provide support and protection. e.g. erosion and flood protection, water purification, carbon sequestration The white paper describes the main economic framework used to value ecosystem services: Total Economic Value (TEV), which includes the value of direct and indirect use, non-use values, and option value, or the benefits of preserving future options. Since the value of nature is not easily characterized – or fully captured – in monetary terms, multiple studies of ecosystem service values characterize their value along multiple, including health and nutrition, livelihood benefits, and cultural significance.

Non-Use Values in TEV Value based on intangible human benefits or non-use. Existence Value: Value from simply knowing that nature exists e.g. charismatic species Option Value: Value from retaining options that may arise in the future e.g. medical discoveries Bequest Value: Value from conserving nature for future generations The white paper describes the main economic framework used to value ecosystem services: Total Economic Value (TEV), which includes the value of direct and indirect use, non-use values, and option value, or the benefits of preserving future options. Since the value of nature is not easily characterized – or fully captured – in monetary terms, multiple studies of ecosystem service values characterize their value along multiple, including health and nutrition, livelihood benefits, and cultural significance.

Direct & indirect market Valuation methods Market valuation Non-market valuation Benefit Transfer Surrogate market Direct & indirect market Hypothetical market Revealed Preference Stated Preference Market price Avoided damages Hedonic pricing Travel cost Contingent Valuation Choice modeling

Market valuation Valuation using conventional good/service prices In a competitive market, the market price depicts the marginal benefit of a good/service Net benefit can be calculated by combining price with quantity and cost estimates Market price method Actual prices of goods/services Avoided damages method Costs incurred in the absence of the service Market prices of equivalent non-ecosystem services

Non-market valuation Revealed-preference methods: use observed behavior to identify value in a surrogate market Hedonic pricing method (Land market) Influence of environmental/ecosystem attributes on property value Travel cost method (Tourism market) Costs of recreational visits as proxy of economic use values associated with ecosystems or sites

Non-market valuation Stated-preference methods: use reported choices to estimate value in a hypothetical market Contingent valuation Ask respondents to express their willingness to pay (WTP) or willingness to accept (WTA) compensation for changes in ecosystem services Choice modeling Ask respondents to rank/rate/choose alternative choice sets which have different combination of price attribute and ecosystem attributes

Benefits / Value Transfer With resource or time constraints, novel analysis may be impossible Benefits transfer uses existing studies to inform valuation efforts Spatial variability demands careful application of this approach biophysical attributes (climate, quality, size…) socio-economic attributes (management, disturbance…)

Valuation methods in InVEST Market valuation Non-market valuation Benefit Transfer Surrogate market Hypothetical market Direct & indirect market Revealed Preference Stated Preference Market price Avoided damages Hedonic pricing Travel cost Contingent Valuation Choice modeling Current InVEST Supplemental analysis with InVEST output

Valuation methods in InVEST ES classification InVEST model Market Price Provisioning Fish Aquaculture Managed Timber Production Wave Energy Reservoir Hydropower Production Agricultural Production Non-timber Forest Product Production Regulating Carbon Sequestration Crop Pollination Water for Irrigation Avoided Damages Regulating Water Purification: Nutrient Retention Sediment Retention Carbon Sequestration Storm Peak Mitigation Travel Cost Cultural/Aesthetic Recreation/Aesthetic

Net Present Value (NPV) The Net Present Value (NPV) of an ecosystem service is the present value of the expected net benefit flows over time. Number of years present landscape conditions are expected to persist, or total years the service is valued for. Discount rate (0%~100%): Weight of present benefits versus future benefits Larger r more weight on present

Limitations Limitations of economic valuation Revealing preferences (partial, indirect, subjective) Aggregating individual preferences (conflicts, relative weight) Addressing uncertainty (in science, in methods) Setting the discount rate (present vs. future) Capturing full value (TEV not often achieved) InVEST provides rapid, conservative valuation Better used for comparison among scenarios Validated value estimates are more reliable for absolute magnitude Daily et al. 2000, The Nature of Value and the Value of Nature.

Discussion Questions What are you hoping to achieve / have you achieved using valuation? When do you think monetary values help? What is your biggest concern about valuation?