Economic valuations and benefit transfer in ARIES Joshua Farley Community Development and Applied Economics Gund Institute for Ecological Economics University of Vermont

Function of values and valuation A feedback signal, generally quantitative, that can help achieve a particular goal or goals A feedback signal, generally quantitative, that can help achieve a particular goal or goals Need to define goals before deciding correct approach to valuation Need to define goals before deciding correct approach to valuation

Conventional economic goals Efficient allocation Efficient allocation Maximize net present monetary value Maximize net present monetary value Rising MC= diminishing MB Rising MC= diminishing MB Market price = marginal value = MC = MB Market price = marginal value = MC = MB Determined by intersection of supply and demand Determined by intersection of supply and demand Demand = preferences weighted by purchasing power Demand = preferences weighted by purchasing power One dollar, one vote. Plutocratic One dollar, one vote. Plutocratic

Economic Surplus Quantity Price = marginal value Producer surplus S D Consumer surplus Economic surplus = consumer surplus + producer surplus

Valuation Estimate market price of non-market ES Estimate market price of non-market ES Approximate marginal benefit for existing supply Approximate marginal benefit for existing supply Provides feedback signal to decision makers’ efforts to supply amounts that maximize monetary values Provides feedback signal to decision makers’ efforts to supply amounts that maximize monetary values

Major concerns Is maximizing monetary value appropriate goal? Is maximizing monetary value appropriate goal? Incommensurability Incommensurability How much for your daughter? How much for your daughter? Marginal valuation, ecological and economic thresholds, uncertainty and ignorance Marginal valuation, ecological and economic thresholds, uncertainty and ignorance Ignores future generations Ignores future generations

Ecological economics goals Desirable scale Desirable scale How much natural capital should be allocated towards economic production, how much should be left intact to generate ecosystem services? How much natural capital should be allocated towards economic production, how much should be left intact to generate ecosystem services? Accounts for future generations Accounts for future generations Just distribution Just distribution Who is entitled to natural capital and economic production? Who is entitled to natural capital and economic production? Allocation of shared inheritance should not be determined by existing purchasing power Allocation of shared inheritance should not be determined by existing purchasing power Efficient allocation Efficient allocation Maximize ratio of economic services gained ES services lost Maximize ratio of economic services gained ES services lost

ARIES approach Quantitative estimates of flows of known valuable services from ecosystem to beneficiaries Quantitative estimates of flows of known valuable services from ecosystem to beneficiaries Value of non-rival ES = sum of marginal values across all beneficiaries Value of non-rival ES = sum of marginal values across all beneficiaries Value of rival ES = highest marginal value to single beneficiary Value of rival ES = highest marginal value to single beneficiary Not all in same units. Addresses incommensurability Not all in same units. Addresses incommensurability Accounts for spatial distribution of different services Accounts for spatial distribution of different services

ARIES approach User can choose weights for different services User can choose weights for different services Imposes commensurability, but transparent Imposes commensurability, but transparent User can choose weights for different beneficiaries User can choose weights for different beneficiaries Just distribution Just distribution Monetary values one option Monetary values one option

Sustainable Scale: Critical Natural Capital Components of natural capital that are essential to human survival and for which there are no adequate substitutes Components of natural capital that are essential to human survival and for which there are no adequate substitutes Small changes in quantity lead to large changes in value Small changes in quantity lead to large changes in value Serious challenge for benefits transfer Serious challenge for benefits transfer

The Demand Curve for Natural Capital Ecological or economic threshold

Region 1 E.g. forests in Vermont E.g. forests in Vermont Far from threshold, slow rate of change, errors less important Far from threshold, slow rate of change, errors less important Price can determine conservation needs Price can determine conservation needs Benefits transfer less risky Benefits transfer less risky

The Demand Curve for Natural Capital Ecological or economic threshold Monetary predictors

Region II E.g. Puget Sound E.g. Puget Sound Estimated price sensitive to small quantity changes and small errors Estimated price sensitive to small quantity changes and small errors Benefits transfer highly questionable Benefits transfer highly questionable Biophysical predictors of value more robust Biophysical predictors of value more robust Knowledge of thresholds and other ecological criteria may be more relevant than price Knowledge of thresholds and other ecological criteria may be more relevant than price Can we transfer knowledge of thresholds? Can we transfer knowledge of thresholds? Scale should determine price Scale should determine price Prices adjust to conservation constraints much more rapidly than ecosystems adjust to prices. Prices adjust to conservation constraints much more rapidly than ecosystems adjust to prices.

The Demand Curve for Natural Capital Ecological or economic threshold Biophysical predictors, focus on conservation

Desirable scale Price

Region III E.g. Madagascar E.g. Madagascar Finance more important than valuation Finance more important than valuation Willingess to pay is critical, but poor measure of actual values Willingess to pay is critical, but poor measure of actual values Should focus on supply curve, not demand curve Should focus on supply curve, not demand curve Supply curve downward sloping Supply curve downward sloping What is most cost effective way to restore critical natural capital? What is most cost effective way to restore critical natural capital? ARIES can trace flows of damages and benefits, help combine polluter pays principle, beneficiary pays principle ARIES can trace flows of damages and benefits, help combine polluter pays principle, beneficiary pays principle

The Demand Curve for Natural Capital Ecological or economic threshold Biophysical predictors, focus on restoration, finance

The Demand Curve for Natural Capital Ecological or economic threshold Scale determines price Monetary Values Finance more important than valuation