6. Values and externalities Joint Nature Conservation Committee

2 External and non-market effects Externalities – an impact (positive or negative) on anyone not party to a given economic transaction Non-market impacts - fall outside market systems. Hence no market price is available

3 Terminology and jargon Fish factory Fish Waste

4 Various dimensions of economic value Total and Marginal Economic Value Financial and economic value Producer and consumer surplus Use and non-use value Direct and indirect values Market and non-market value Costs and benefits

5 Total versus marginal values Total Values –Demonstrating value of biodiversity –Revising national income accounts Marginal Values –Influencing policies and projects –Assessing biodiversity impacts of non-biodiversity investments –Determining liability for biodiversity loss –Setting charges, taxes and fines –Setting priorities for conservation within limited budget

Marginal approach often better for influencing policy Net benefits from coastal ecosystem Time Net benefits from coastal ecosystem Time Benefits with MPA MPA implementation Cost of MPA Benefits without MPA Costs of management Benefits of management

7 Total Economic Value (TEV) Total Economic Value Use valuesNon-use values Direct useIndirect useOption valueBequest valueExistence value Example: -Timber -Tourism -Drinking water Example: -Coastal protection -Water purification -Carbon sequestering Example: - Genetic materials - Biodiversity - Clean soils Example: - Avoided damage from climate change Example: - Rare species - Indigenous rights Warning for using TEV: Different management regimes result in different flows of benefits. If ecosystem are not sustainably managed, future benefits decline. At large scales, observed prices unlikely to be applicable. Rare to lose all ecosystem services.

8 Use Value 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

9 Value based on intangible human benefits. –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 Non-Use Value

10 Producer and consumer surplus (1) 5.0 willingness to pay 3.0 price 0.5 cost 2.0 is my ‘benefit’ (consumer surplus) 2.5 is his ‘profit’ (producer surplus) Economic value is: = 4.5

11 CS PS Q* P* supply $ quantity demand Producer and consumer surplus (2)

12 Financial and economic value 5.0 willingness to pay 3.0 price 0.5 cost 2.0 is my ‘benefit’ (consumer surplus) 2.5 is his ‘profit’ (producer surplus) Economic value = 4.5 Financial value = 3.0 Directly observable Not directly observable

13 Example 1: TEV of world’s ecosystem services US$33 trillion (US$16-54 trillion a year) Hugely controversial –Variation in values across different sites –Estimates of average value based on marginal changes –Exceeds total global economic income –Not policy focused Costanza et al. Nature. (1997)

14 Grasslands $ 232/ha/yr Open ocean $ 252/ha/yr Coral reefs $ 675/ha/yr Tropical forests $ 2,007/ha/yr Lakes/rivers $ 8,498/ha/yr Wetlands $ 14,785/ha/yr Example 1: TEV of world’s ecosystem services (2)

15 Example 2: Conservation or Conversion? TEV of managing ecosystems sustainably often higher than TEV of converted ecosystems. Benefit-cost ratio of global programme for conservation = 100:1 Habitat loss costs US$250 billion per year Balmford et al. Science. (2002)

16 Example 2: Conservation or Conversion? (2)

Example 3: Economic value of Coral Reefs in Guam Coastal protection 7% Biodiversity 2% Fishery 3% Amenity 8% Recreation 7% Tourism 73% Annual values of coral reefs in Guam amount to US$127 million, equivalent to 7% of GDP.

Fish Tourism Protect Amenity Biodiv. overlay Priority intervention areas  economic value Threats map Spatial Distribution of Economic Values Example 3: Economic value of Coral Reefs in Guam (2)

19 Assignment Identify the main economic values of your project. In doing so, do consider using the following categorisations: –Costs & benefits –Use & non-use values –Direct & indirect values –Local & global values –Market & non-market values –Internal & external effects