2. How do economists think? Joint Nature Conservation Committee

“Academic disciplines are often separated by gulfs of mutual incomprehension, but the deepest and widest may be the one that separates most economists from most environmentalists…. What underlies this is not so much disagreements about facts as disagreement about how to think.” (Economist, 2002) Part I. How do economists think?

3 Main message Economics  Finance!

Study of allocating & managing scarce natural & environmental resources optimally accounting for externalities Environmental and Natural Resource Economics Scarcity is a basic concept of economics. When something is scarce, it has value One cannot move without making at least one person worse off Occurs when a decision causes costs or benefits to individuals or groups other than the person making the decision

Natural Resource & Environmental Economics is a way of thinking & a tool-box that supports this 1. Environmental economics 2. Evaluation tools: Cost benefits & cost effectiveness analysis 3. Valuation tools: CVM, HP, TCM, PF, CE 4. Economic survey: Focus groups, face-to-face, experiments 5. Economic instruments for Sustainable financing: Tax, fees, charges, etc. Concept & tool

6 “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) Part 2. How do economists define value?

7 Valuing the environment Environmental resources are scarce and valuable Often no markets or prices exist for ecosystem services Valuation makes value of environment explicit Valuation techniques estimate values based on human decisions, either actual or hypothetical

8 Common Misunderstandings Values are put in monetary terms as the most convenient measure of ‘utility’, not because only money matters. Valuation reflects more than financial gains from resource extraction. Valuation does not ignore cultural and spiritual values.

9 Part 3. Why Think Like an Economist? Demonstrate and communicate the value of the environment Persuade politicians with cost- benefit analysis Change behaviour through economic incentives

Why is economic valuation useful? Environmental & social benefits (in non $) Financial costs (in $) Financial benefits (revenues) (in $) Financial benefits (revenues) (in $) Financial costs (in $)

Environmental & social benefits (in $) Financial costs (in $) Financial benefits (revenues) (in $) Financial costs (in $) Environmental & social benefits (in $) Financial benefits (revenues) (in $) Why is economic valuation useful?

12 Practical arguments for valuation – Money talks! Limited budgets; unlimited wants Communicate value of biodiversity Justify conservation & sustainable use Increase transparency & accountability Important element of other tools e.g. market– based instruments

13 Part 4. Why Economists remain Imperfect? Empirical methods flawed or imprecise –Not all ecosystem services easy to value –Limitations of methods Philosophical issues –Intrinsic value not included Money is wrong unit –Affected by income distribution and ability to pay Valuation only ever part of the answer!

14 Importance of Science Biggest challenges in valuation is ecological understanding: –how ecosystem provides services –related cause-effect relationships The more is known about ecology, the more robust the valuation.

15 Discussion