Presentation: Valuing Ecosystem Services, Methods and Practices


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This presentation explores the various methods by which one may place a value on ecosystem services, such as wetlands, forests. etc.

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  • Topic Definition What is ecosystem valuation? Ecosystem valuation is a set of methods and tools used to assign dollar values to ecosystem services, which aid in decision-making around ecosystem management options. By placing values on ecosystems, positive qualities and elements of ecosystems which are usually regarded in qualitative terms can be put into the same units as traditional measures (dollars). There are three categories of ecosystem valuation techniques: Method 1: Market Prices. This category of methods relies of the careful examination of goods or services provided by ecosystems that are also available in commercial markets in some form. Ecosystem goods and services are compared to similar or substitute goods and services that are available for commercial trade, and thus already have price tags attached to them. Those price tags are then extrapolated to ecosystems that provide the same or similar goods and services. An example of these methods in use would be where a watershed’s water-purification value would be calculated using the cost of building a water cleaning plant. This has the advantage of providing very precise values, but such methods often fail to capture ecosystem qualities that have no equivalent that is commercially traded. Method 2: Circumstantial Evidence. When using this class of methods, respondents are asked how much they would be willing to pay to avoid a certain choice. In other words, various ecosystem management options are presented to subjects with their concurrent environmental dangers. Respondents are then asked to say how much they would pay to avoid those types of environmental damages. This method is then extrapolated back in order to value the ecosystem in its unaltered state. Method 3: Surveys . These methods are used when comparison to commercially traded goods and services is impractical. For instance, some ecosystems offer goods that have no equivalent on the traded market, and therefore cannot be accurately valued using either of the methods above. In this case, respondents are asked to either simply estimate what they would be willing to pay for a given ecosystem good or service, or asked to choose between different ecosystem management alternatives, enabling a willingness-to-pay estimate to be extrapolated. Definitions for 8 Dollar-based Ecosystem Valuation methodologies 1) Market Price Method Estimates economic values for ecosystem products or services that are bought and sold in commercial markets. 2) Productivity Method Estimates economic values for ecosystem products or services that contribute to the production of commercially marketed goods 3) Hedonic Pricing Method Estimates economic values for ecosystem or environmental services that directly affect market prices of some other good. Most commonly applied to variations in housing prices that reflect the value of local environmental attributes. 4) Travel Cost Method Estimates economic values associated with ecosystems or sites that are used for recreation. Assumes that the value of a site is reflected in how much people are willing to pay to travel to visit the site. 5) Damage Cost Avoided, Replacement Cost, and Substitute Cost Methods Estimate economic values based on costs of avoided damages resulting from lost ecosystem services, costs of replacing ecosystem services, or costs of providing substitute services.  6) Contingent Valuation Method Estimates economic values for virtually any ecosystem or environmental service. The most widely used method for estimating non-use, or “passive use” values. Asks people to directly state their willingness to pay for specific environmental services, based on a hypothetical scenario. 7) Contingent Choice Method Estimates economic values for virtually any ecosystem or environmental service. Based on asking people to make tradeoffs among sets of ecosystem or environmental services or characteristics. Does not directly ask for willingness to pay—this is inferred from tradeoffs that include cost as an attribute. 8) Benefit Transfer Method Estimates economic values by transferring existing benefit estimates from studies already completed for another location or issue.
  • Website: Market Price Method: ( What: estimates the economic value of ecosystem products and services that are traded (bought & sold) in commercial markets. When: primary resource affected is commercially marketed, and thus market prices are known meaning that reliable market data is available. How: Measure economic surplus (consumer surplus + producer surplus) from the ecosystem activity - before & after – the disruption/closure of that good or service. How to use results: Results can be used to compare the benefits of an action to the costs of such actions, thus deriving the economic valuation for an ecosystem service Application: Need market data, have to assume that it is a perfect market, relies on individuals’ values in terms of willingness to pay & willingness to consume Advantages: 1) People’s values are defined, 2) Market data is easier to obtain, 3) data is based on observed preferences, and 4) uses standard economic techniques. Disadvantages: 1) Does not account for alternative value / opportunity cost provided by the ecosystem, 2) does not take in to account market imperfections and other intrinsic externalities, 3) difficult to measure value from large scale ecosystemic changes affecting supply & demand, and 4) May overstate benefits due to lack of whole spectrum analysis. When to use it? Primary resource affected is commercially marketed, known market price & reliable market data 2) Productivity Method: (aka Net Factor Income or Derived Value Method) ( What: estimates the economic value provided by an ecosystem good or service that contribute to the production of commercially marketed goods. When: Ecosystem prod or serv is used with other inputs to produce a commercially marketed good or service & Environmental quality directly affects the cost of producing & marketing a commercial good. Eg: take action to improve water quality How: Comparing the costs of actions needed to maintain/improve quality to the costs avoided if no action is needed. Eg: preventing ag runoff in to drinking water vs purifying it to supply it. How to use results: use analysis to compare the costs of the prevention program to the costs of the clean up. Which is more beneficial? Application: Need costs of production for final good, supply & demand for the final good & supply and demand for other factors of production. Case study of Productivity Method: Values of Wetlands in the Peconic Estuary, Long Island, NY. Apply when: 1) Ecosystem resource is a perfect substitute for the other option. 2) Where only producers benefit from the changes in quality or quantity of the resource & consumers are not involved. Advantages: 1) Methodology is straightforward, 2) Data need is limited, data is readily available and thus method is relatively inxpensive Disadvantages: 1) limited to valuing ecosystem resources that are used in production. 2) value captured is only a component of the overall ecosystem, not as a whole. 3) need Scientific understanding or inter-dependent relationships within the ecosystem, and 4) Analysis could become complex if final price of marketed good or the price of other inputs change. Therefore, it works better in static situations with fewer variables. When to use it? Ecosystem product or service is used in production & Environmental quality directly affects the good
  • Hedonic pricing model The hedonic pricing model is used to estimate the extent to which each factor affects the price. (It decomposes the price of an item into separate components that determine the price.) A hedonic pricing model identifying price factors according to the premise that price is determined both by internal characteristics of the good being sold and external factors affecting it. The most common example of the hedonic pricing method is in the housing market: the price of a property is determined by the characteristics of the house (size, appearance, features, condition) as well as the characteristics of the surrounding neighborhood (accessibility to schools and shopping, level of water and air pollution, value of other homes , etc.) One use of hedonic models is to adjust measures of inflation. The difference this makes is most significant for products that are not directly comparable with those that were sold in the past because technology has improved (personal computer). This method can be used when ecosystems values influence the price of the marketed goods (housing): Positive environmental amenities: clean air, large surface of water, aesthetic views or proximity to recreational sites Negative: poor environmental quality, including air pollution, water pollution, or noise Hedonic price factors are not usually of much importance to investors except when doing detailed modeling of product prices. This will only occur when doing very detailed models or when looking at prices that can naturally be decomposed into hedonic elements (such as house prices). To apply the hedonic pricing method, the following information must be collected:  - A measure or index of the environmental amenity of interest Cross-section and/or time-series data on property values and property and household characteristics for a well-defined market area that includes homes with different levels of environmental quality, or different distances to an environmental amenity, such as open space or the coastline. The data are analyzed using regression analysis , which relates the price of the property to its characteristics and the environmental characteristics of interest.  Thus, the effects of different characteristics on price can be estimated.  The regression results indicate how much property values will change for a small change in each characteristic, holding all other characteristics constant. The analysis may be complicated by a number of factors.  For example, the relationship between price and characteristics of the property may not be linear – prices may increase at an increasing or decreasing rate when characteristics change. In addition, many of the variables are likely to be correlated, so that their values change in similar ways.  This can lead to understating the significance of some variables in the analysis. Thus, different functional forms and model specifications for the analysis must be considered. PPT presentation on Hedonic pricing model with examples of the effects of the air pollution and proximity of a broad leaf plants to the residential housing on the pricing: How to use it? Decompose the price of an item into separate components that determine the price Determine the value and the price of the characteristics of a good, or the services it provides When to use it? Ecosystems values (environmental amenities, aesthetic qualities ) influence the price of the marketed goods Housing market Advantages Relatively straightforward and uncontroversial to apply Based on actual market prices and fairly easily measured data  Inexpensive to apply (if data are readily available) Disadvantages Only captures people’s willingness to pay for perceived benefits Very data intensive Costly if data is not readily available When to use it? When price is influenced by Ecosystem values When surrounding Environment matters Travel Cost method The travel cost method is used to estimate economic use values associated with ecosystems or sites that are used for recreation.  It assumes that the value of the site or its recreational services is reflected in how much people are willing to pay to get there.  It uses actual behavior and choices to infer values.  Thus, peoples’ preferences are revealed by their choices. The basic premise of the travel cost method is that the time and travel cost expenses that people incur to visit a site represent the “price” of access to the site. The method can be used to estimate the economic benefits or costs resulting from: changes in access costs for a recreational site elimination of an existing recreational site addition of a new recreational site changes in environmental quality at a recreational site The basic premise of the travel cost method is that the time and travel cost expenses that people incur to visit a site represent the “price” of access to the site.  Thus, peoples’ willingness to pay to visit the site can be estimated based on the number of trips that they make at different travel costs.  This is analogous to estimating peoples’ willingness to pay for a marketed good based on the quantity demanded at different prices. There are several variations of the travel cost method: Zonal travel cost approach, using mostly secondary data, with some simple data collected from visitors. This method is the simplest and least expensive approach. It estimates a value for recreational services of the site as a whole. It cannot easily be used to value a change in quality of recreation for a site, and may not consider some of the factors that may be important determinants of value.  An Individual travel cost approach is similar to the zonal approach, but uses survey data from individual visitors in the statistical analysis, rather than data from each zone. This method thus requires more data collection and slightly more complicated analysis, but will give more precise results.  Random utility approach is the most complicated and expensive of the travel cost approaches. It is most appropriate when there are many substitute sites. This model requires information on all possible sites that a visitor might select, their quality characteristics, and the travel costs to each site. It assumes that individuals make tradeoffs between site quality and the price of travel to the site. It allows for much more flexibility in calculating benefits. The basic information that needs to be collected to apply the travel cost method: number of visits from each origin zone (usually defined by zip code) demographic information about people from each zone round-trip mileage from each zonetravel costs per mile the value of time spent traveling, or the opportunity cost of travel time More information is needed for more complicated analyses. This information is typically collected through surveys—on-site, telephone or mail surveys may be used.  In addition, especially for simpler applications, much information may be available from state and county resource agencies, or from federal surveys, such as the National Survey of Fishing, Hunting and Wildlife Associated Recreation , published every five years by the U.S. Fish and Wildlife Service (available at ). The most controversial aspects of the travel cost method include accounting for the opportunity cost of travel time, how to handle multi-purpose and multi-destination trips, and the fact that travel time might not be a cost to some people, but might be part of the recreational experience. How to use it? The recreational value of a site is estimated from the amount of money that people spend on reaching the site When to use it? When evaluating ecosystems or sites that are used for recreation or tourism Advantages Closely mimics empirical techniques used by economists to estimate economic values based on market prices. Based on actual behavior Relatively inexpensive to apply Results are relatively easy to interpret and explain Disadvantages Only gives an estimate Over-estimates are easily made as the site may not be the only reason for traveling to that area Requires a lot of quantitative data When to use it? Recreation or tourism Case studies and examples: Economic Valuation of Wetlands: Example of Hedonic Quality Adjustment Methods For Clothes Dryers In the U.S. CPI The Economic Value of Nature’s Services in the Puget Sound Basin (Evaluation methods: pages 44-46):
  • Damage Cost Avoided/Replacement Cost/Substitute Cost methods These three ecosystem valuation methods are very similar in that they base their estimations of ecosystem value on the cost of avoiding damages to the ecosystem altogether, the cost to replace the ecosystem services, or the cost to provide a substitute. These methods assume that the value of the ecosystem service is equal to the cost to replace those services or to avoid damages to those services with other method. These methods of valuation are not based on the willingness of individuals to pay for them. These are a minimum estimate of money saved. These methods are useful when willingness-to-pay is difficult or impossible to determine. They are also easy to implement, and are not very resource or time intensive. These methods are useful for valuing ecosystem services, but do not take into account the fact that ecosystems can provide many different services at the same time. “ These approaches should be used only after a project has been implemented or if society has demonstrated their willingness-to-pay for the project in some other way (e.g., approved spending for the project). Otherwise there is no indication that the value of the good or service provided by the ecological resource to the affected community greater than the estimated cost of the project.” ( The damage cost approach only takes into account the actual damage that occurred, not the lost opportunity costs from the potential uses from the ecosystem, therefore, it may vastly undervalue the ecosystem. There are very few cases under which the damage cost approach would provide an accurate valuation of ecosystem services: “ The condition under which the damage function approach provides a conceptually correct result is somewhat restrictive, namely that there is no impact on market price due to changes in the cost of production that result from environmental improvements. This would hold, for example, if the firms that benefit from an improvement in environmental conditions have only a small share of industry output or if prices are set largely on world markets so that the benefits of an environmental improvement are captured solely by domestic producers. “( When to use it? When willingness-to-pay is too difficult to determine When costs have already been or will be paid As a last resort Contingent Valuation Contingent Valuation evaluates individuals’ willingness-to-pay for ecosystem services. The amount people would pay/accept under the theoretical condition that biodiversity could be bought and sold. This method is considered a “Stated Preference” method, because people are asked to state how much they value something, instead of what people have actually paid for ecosystem services. This method uses surveys to question individuals on how much they would be willing to pay for ecosystem services based on a hypothetical scenario. Surveyors typically instruct the respondents to imagine that the ecosystem service in question has been lost. It then asks them how much they would be willing to pay to prevent or avoid the loss of the services. The valuation is completely based on the construction of the hypothetical scenario, so great care must be taken in constructing a relevant scenario. Care must also be taken to use a statistically relevant survey methodology. This can be extremely lengthy and time consuming. Because it is a hypothetical scenario and respondents are not spending their own real dollars to prevent or avoid the loss of the ecosystem services, they may not report an amount that is too high or too low. In addition to this, individuals may not always know how much they would value a particular ecosystem service “ non-use” refers to ecosystem services that people aren’t currently paying for, because these services don’t participate in the open market for services, i.e. clean air, biodiversity, etc. Contingent Valuation is one of the only methods that can put a value on non-use systems. Contingent Valuation is very flexible, and can be used to value almost anything, but it is also very controversial. I t is very useful in situations where no other methods will work to value ecosystem services. The downside is that it doesn’t provide values that are likely to be accepted in a legal framework. When to use it? Best used when “non-use” ecosystem values are important
  • Contingent Choice:,M1 The Contingent Choice method is very similar to the Contingent Valuation method. Intead of asking respondents how much they would pay for a particular ecosystem, respondents are asked to choose between various ecosystem management possibilities. By analysis of reported choices, valuations and rankings of each ecosystem management policy can created. In other words, the choices together create a distribution, which can be used to infer dollar value. The distance between each ecosystem management choice can then be analyzed to find the marginal rate of substitution for certain attributes. When to use it? When ranking options Comparing apples to oranges Benefit Transfer:!OpenDocument Benefit transfer is the ultimate quick and dirty method of valuing ecosystem services. This method involves doing no actual study itself. Instead, it looks for other studies that have examined situations similar to the one in question, trying to find other research that matches on as many dimensions as possible. The conclusions from that other research are extrapolated and used for the ecosystem valuation in question. This approach is excellent for making quick, low-cost, and initial valuations. It is significantly better than doing nothing, which is its most common alternative (the benefit transfer method requires only marginally more time and effort than doing nothing, while other valuation methods can be quite expensive and time-consuming). However, it has many obvious disadvantages, such as a lack of a wide variety of definitive original surveys to extrapolate from, and complete dependence on the quality of the initial work. While it comes last in this presentation of ecosystem valuation methods, it is perhaps the first method that should be employed at the beginning of an ecosystem valuation process. When to use it? When there isn’t enough time to perform a study When performing a study is too expensive
  • The Economic Value of Nature’s Services in the Puget Sound Basin (Evaluation methods: pages 44-46): Economic Valuation of Wetlands: U.S. Fish and Wildlife Service .,M1!OpenDocument Ecosystem services:
  • Presentation: Valuing Ecosystem Services, Methods and Practices

    1. 1. Valuing Ecosystem Services Methods and Practices Bolotina, Shah, Puma, Winokur
    2. 2. <ul><li>Ecosystem Valuation: </li></ul><ul><ul><li>A suite of methods for assigning a dollar value to ecosystem services to aid in decision-making </li></ul></ul><ul><li>Market Prices Methods: Revealed Willingness to Pay (WTP) </li></ul><ul><ul><li>Value an equivalent product or service on the commercial market and extrapolate to ecosystems </li></ul></ul><ul><li>Circumstantial Evidence: Imputed WTP </li></ul><ul><ul><li>Value based on what people are willing to pay to avoid certain consequences </li></ul></ul><ul><li>Surveys: Expressed WTP </li></ul><ul><ul><li>Value based on direct questions or hypothetical choices </li></ul></ul>Ecosystem Valuation Methods  Categories of Methods  Productivity (1) Damage avoided, Replacement Cost, Substitute Cost (2) Benefit Transfer (3) Contingent Choice (3) Contingent Valuation (3) Travel Cost (1) Hedonic Pricing (1) Market Price (1) Dollar-Based EV Methods
    3. 3. <ul><li>Market Price Method </li></ul><ul><li>Definition </li></ul><ul><ul><li>Measure economic surplus from ecosystem activity </li></ul></ul><ul><li>Advantages </li></ul><ul><ul><li>People’s values are defined </li></ul></ul><ul><ul><li>Market data is available and based on observed preferences </li></ul></ul><ul><ul><li>Relies on standard economic techniques </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Alternative costs/benefits are not accounted </li></ul></ul><ul><ul><li>Ignores intrinsic externalities </li></ul></ul><ul><ul><li>Lacks whole spectrum analysis </li></ul></ul><ul><li>Productivity Method </li></ul><ul><li>Definition </li></ul><ul><ul><li>Compare costs of prevention to costs of action to improve/maintain ecosystem </li></ul></ul><ul><li>Advantages </li></ul><ul><ul><li>Straightforward </li></ul></ul><ul><ul><li>Limited need for data & data is available </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Limited to ecosystem resources used in production </li></ul></ul><ul><ul><li>Value captured is a component of overall worth </li></ul></ul><ul><ul><li>Requires a scientific understanding of ecosystem inter-dependencies </li></ul></ul><ul><ul><li>Based on static situations </li></ul></ul>
    4. 4. <ul><li>Hedonic Pricing </li></ul><ul><li>Definition </li></ul><ul><ul><li>Identify components of the whole </li></ul></ul><ul><ul><li>Determine value and price of each component </li></ul></ul><ul><li>Advantages </li></ul><ul><ul><li>Straightforward </li></ul></ul><ul><ul><li>Uncontroversial to apply </li></ul></ul><ul><ul><li>Based on actual market prices </li></ul></ul><ul><ul><li>Uses easily measured data  </li></ul></ul><ul><ul><li>Inexpensive (if data are readily available) </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Captures Willingness to Pay </li></ul></ul><ul><ul><li>Ignores unperceived benefits </li></ul></ul><ul><ul><li>Very data intensive </li></ul></ul><ul><ul><li>Costly (if data is not readily available) </li></ul></ul><ul><li>Travel Cost </li></ul><ul><li>Definition </li></ul><ul><ul><li>Determine amount of money people pay to reach the site </li></ul></ul><ul><li>Advantages </li></ul><ul><ul><li>Based on market prices </li></ul></ul><ul><ul><li>Based on actual behavior </li></ul></ul><ul><ul><li>Relatively inexpensive </li></ul></ul><ul><ul><li>Results are easy to interpret and explain </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Only gives an estimate </li></ul></ul><ul><ul><li>Over-estimates are easily made </li></ul></ul><ul><ul><li>Requires lot of quantitative data </li></ul></ul><ul><ul><li>Ineffective for unpopular travel destinations </li></ul></ul>
    5. 5. <ul><li>Definition </li></ul><ul><ul><li>Carefully define ecosystem services and target population </li></ul></ul><ul><ul><li>Carefully construct survey methodology that produces relevant results </li></ul></ul><ul><li>Advantages </li></ul><ul><ul><li>Very flexible – can value almost anything </li></ul></ul><ul><ul><li>Easy to use and understand </li></ul></ul><ul><ul><li>Widely accepted </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Complicated, lengthy, expensive to do right </li></ul></ul><ul><ul><li>Controversial - hypothetical results disputed by some </li></ul></ul><ul><ul><li>Individuals don’t always know how to value ecosystem services </li></ul></ul><ul><ul><li>Choice of scenarios influences results </li></ul></ul><ul><li>Damage Cost Avoided/ Replacement/Substitute Cost </li></ul><ul><li>Definition </li></ul><ul><ul><li>Assess environmental services and estimate damage or least costly substitute/replacement </li></ul></ul><ul><ul><li>Estimate amounts to avoid damages, potential damages and substitute/replacement </li></ul></ul><ul><li>Advantages </li></ul><ul><ul><li>Low cost to implement </li></ul></ul><ul><ul><li>Easy to apply and analyze </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Env resources don’t usually have direct substitutes </li></ul></ul><ul><ul><li>Does not provide measure of true economic value </li></ul></ul><ul><li>Contingent Valuation </li></ul>
    6. 6. <ul><li>Contingent Choice </li></ul><ul><li>Definition </li></ul><ul><ul><li>Subjects consider hypothetical choices between resource management approaches </li></ul></ul><ul><ul><li>Valuation is inferred by ranking choices </li></ul></ul><ul><li>Advantages: </li></ul><ul><ul><li>When cost/benefit is hard to quantify or estimate </li></ul></ul><ul><ul><li>Qualitative evaluation is easier than estimating dollar value </li></ul></ul><ul><li>Disadvantages: </li></ul><ul><ul><li>Difficult to translate into dollar valuations </li></ul></ul><ul><ul><li>Doesn’t scale well </li></ul></ul><ul><li>Benefit Transfer </li></ul><ul><li>Definition </li></ul><ul><ul><li>Identify another study of the same benefit </li></ul></ul><ul><ul><li>Transfer the findings to the situation in question </li></ul></ul><ul><li>Advantages: </li></ul><ul><ul><li>Cheap, quick and dirty </li></ul></ul><ul><ul><li>Provides an initial lens for subsequent valuations </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Transferred values are only as good as the original study </li></ul></ul><ul><ul><li>Not a large pool of established studies to pull from </li></ul></ul>$ $
    7. 7. <ul><li>Discuss the advantages and disadvantages of stated preference and revealed preference valuation methods. Give a real-world example. </li></ul><ul><li>The essential part of ecosystem valuation is Ecosystem Services evaluation. Do you think this graphic addresses all of its components or would you add any? </li></ul><ul><li>Which of the described evaluation methods most comprehensively addresses Ecosystem Service valuation? </li></ul><ul><li>How might your capstone venture use ecosystem valuation? Which method would make the most sense for your purposes? </li></ul><ul><li>Do you think any of these methods can capture the true value of an ecosystem? What other methods might you suggest? </li></ul>Discussion Questions
    8. 8. References <ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li>Economic Valuation of Wetlands: </li></ul><ul><li>U.S. Fish and Wildlife Service </li></ul><ul><li>,M1 </li></ul><ul><li>!OpenDocument </li></ul><ul><li>The Economic Value of Nature’s Services in the Puget Sound Basin </li></ul><ul><li>Ecosystem services: </li></ul>