Ecosystem Valuation Ecosystem Valuation ES 100: November 17 th, 2006 “We have estimated the current economic value of 17 ecosystem services for 16 biomes, based on published studies and a few original calculations. For the entire biosphere, the value (most of which is outside the market) is estimated to be in the range of US $16-54 trillion per year, with an average of US $33 trillion per year… Global gross national product total is around US $18 trillion per year.” ~Costanza, et al, “The Value of the World’s Ecosystem Services and Natural Capital” Nature, May 1997

Economy vs. Ecology? Both words have the same Greek root, “oikos” Economics: focus is humans Ecology: focus is all living things

Environmental Economics: Externalities Externalities: costs or benefits that are (imposed and) not paid for by the consumer or producer. –Positive externality: beneficial external cost Apple orchard and apiary –Negative externality: harmful external cost Pollution Biodiversity Loss Neg. Externalities can be ‘internalized’ by making buyer/seller pay costs –Regulation (Taxes, Fees, Tradable pollution permits, permits….)

Market vs. Non-Market Goods Market goods: things that are bought and sold. Value is net benefit (producer + consumer surplus) Non-market goods: things that are not bought or sold

Wetland Ecosystem Services Food/Jobs Important Habitat for Species Clean water/Nutrient storage Flood control Erosion control Carbon storage Tourism Which are market/non-market goods?

How Non-Market Goods are Valued Revealed Preferences: visitation rates for eutrophic vs. mesotrophic lake Contingent Valuation: ask people (surveys) Cost of Substitutes Each has its own advantages and disadvantages!!

….but, future costs & benefits are not always known… ….but, future costs & benefits are not always known… Expected Costs and Benefits

Expected Value of Betting Red on Roulette EV=p 1 V 1 +p 2 V 2 +…p n V n EV=(18/38)($1)+(18/38)(-$1)+(2/38)(-$1)= - $0.05 This is NOT a good bet!

Calculate Expected Costs/Benefits –Separate possible outcomes (‘states of the world’) –Assign probabilities to each possible outcome –Compute the Expected Value by EV=p 1 V 1 +p 2 V 2 +…p n V n p 1 +p 2 +… p n =1 Key: EV = Expected Value p 1 = probability of outcome #1 V 1 = value of outcome #1 p 2 = probability of outcome #2 V 2 = value of outcome #2 p n = probability of outcome #n V n = value of outcome #n

Expected Value of Invasive Species Eradication Policy Could compare to costs of damage done by invasive Adopt policy if cost from damage > cost to eradicate Could compare net benefit of Policy 1 to Policy 2 Select policy with largest net benefit

Human Perceptions & C-B Analysis

The Future is Uncertain: Discounting Why are future costs and benefits devalued? _____________________________ **Humans like benefits now, costs later

Discounting the Future $100 received in 50 years isn’t worth as much as $100 now To avoid $100 in costs 50 years from now isn’t worth paying $100 now Future Benefits are devalued: Future Costs are devalued:

Discounting Formula: Key: n = year (n=0 is the present, n=1 is next year…) V p = Present value ($) V n = Value in year ‘n’ ($) r = discount rate (fraction)

Discounting vs. Sustainability “Sustainable” practices usually have high initial costs, and a long stream of benefits. Does discounting favor sustainable, or unsustainable practices? How does this apply to (other) environmental problems?

Net Present Value: Discounting a Stream of Payments (Cost/Benefits) Evaluating the benefit of removing invasive Melaleuca: You are hired to determine how much money is reasonable to spend on a policy to eradicate Melaleuca from the Florida Everglades. You believe that the annual cost of this invasive species is $100 million per year.

Evaluating the Cost of Melaleuca Eradication You are in charge of managing invasive Melaleuca in the Florida Everglades. You are evaluating the following two methods of management: Physical removal: Cost = $1 million/year, forever Massive poisoning: Cost = $10 billion (one-time cost) Which technology should you use, from an economic standpoint? (assume costs incorporate all externalities)

Economy vs. Ecology? Disproportionalities Globally, the 20% of the world's people in the highest-income countries account for 86% of total private consumption expenditures – the poorest 20% a minuscule 1.3%. the richest fifth More specifically, the richest fifth : Consume 45% of all meat and fish, the poorest fifth 5%. Consume 58% of total energy, the poorest fifth less than 4%. Consume 84% of all paper, the poorest fifth 1.1%. Own 87% of the world's vehicle fleet, the poorest fifth less than 1%. — Human Development Report 1998 Overview, United Nations Development Programme (UNDP)Human Development Report 1998 Overview

Valuing Biodiversity: Key Points Environmental Economics: Deals with Externalities Cost/Benefit analysis in decision making –Market vs. non-market goods –Valuation methods: revealed preferences, contingent valuation, cost of substitutes –Calculating C/B under uncertainty: Expected Value Environment vs. Economy? –Sustainability –Discounting the Future: Net Present Value –Disproportionalities