1. 2 April, InVEST Introductory Seminar, Bangkok
Valuation
Emily McKenzie
2 April, InVEST Introductory Seminar, Bangkok

2. “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)

3. 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.

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

5. 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

6. 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

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

8. 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

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

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

11. 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

12. 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

13. 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.

14. 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.

15. 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

16. 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

17. 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

18. 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

19. 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…)

20. 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

21. 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

22. 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

23. 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.

24. 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?