Valuing ecosystem goods and services


  • Jon C. Lovett,

    Corresponding author
    1. Environment Department, Centre for Ecology, Law and Policy, University of York, York YO10 5DD, U.K.; Technology and Sustainable Development Section, Centre for Clean Technology and Environmental Policy, University of Twente, PO Box 217, 7500 AE Enschede, The Netherlands
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  • Stacey Noel

    1. Stockholm Environment Institute, York Centre, University of York, York YO10 5DD, U.K.
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We all place value on ecosystem goods and services in some form or another. It is in the air we breathe from oxygen produced by photosynthesis, in fruits we eat from pollination by bees, in water we drink from mountain catchments and even in thoughts we have about the very existence of wildlife. But there is concern that these values are not represented in policy, resulting in degradation of natural systems. One way of remedying this is to create a market so that payments are made in proportion to the provision of goods and services. For example, if water produced by a forested catchment supplies agriculture or cities, then some of that value should be returned to protective management of the forest. In this way, policy and market failures are both corrected and the forest conserved. But monetization of ecosystems and payments for services are not straightforward and in fact these values may be used in political negotiation rather than as the basis for a market.

The value of ecosystem services has been estimated at a range of scales (Costanza et al., 1997; Emerton & Bos, 2004; Millennium Ecosystem Assessment, 2005) and environmental capital has been described as ‘a critical component of the asset base of most developing economies’ representing 26% of total wealth (Pearce, 2005). It is also increasingly accepted that poor rural households in developing countries rely more heavily on surrounding landscapes for provision of direct and indirect ecosystem goods and services than richer members of a community. So safeguarding environmental sustainability can be a ‘win-win’ for low- and middle-income countries: a strategy for promoting economic growth while achieving poverty reduction and environmental valuation techniques have been developed accordingly (WRI, 2005; Smith, de Groot & Bergkamp, 2006; Barbier, 2007).

However, there are a number of methodological challenges to valuation, such as lack of markets and double counting; as a result, these services have rarely been considered in monetary terms when decisions on land use changes are taken and thus the true costs of drawing down these assets have not been accurately assessed. Typically, investment decisions have considered only direct use values (provisioning services) and less often indirect (regulating services) and option values, while almost totally ignoring nonuse values (bequest, existence and cultural) that require extensive stakeholder consultations. Yet local community members, individually as the custodians of private land and collectively as caretakers of common pool resources, are the source of knowledge on the total value – economic and noneconomic – of these landscapes. Any valuation methodology that fails to work closely with the local community will miss key costs and benefits in evaluating policy decisions over landscape options.

Then there is the question of what sort of values can be included in the market. In a classic, but often forgotten, paper Calabresi & Melamed (1972) discussed different types of entitlements in an environmental context. Whenever a state is presented with the conflicting interests of two or more people or groups, it must decide which side to favour. First order legal decisions determine who has the entitlement, such as the entitlement to pollute or the entitlement to hunt. Second order decisions determine the manner in which entitlements are protected and whether or not they can be traded or sold. In any given dispute, the state must decide not only which side wins but also the kind of protection to grant. Essentially, there are three types of entitlements, though entitlements to most goods are mixed. Entitlements protected by property rules can be bought and sold in a ‘willing buyer willing seller’ market. In the absence of distortions, the supply and price of goods covered by property rules are determined by the ‘hidden hand’ of the market. Entitlements protected by liability rules have their value and transfer determined by the State rather than the open market; but payments can still be made and rights transferred. The third type is inalienable entitlements which are governed by moralisms, for example, rights to ‘life, health and liberty’. Most environmental issues are governed by moralisms, such as the right to hunt or protection of a rare species. Placing an inalienable entitlement into a market governed by property rules is thus a category error – there should not be a market for the values represented by species conservation or cultural heritage. Thus monetizing this type of value and using it in a decision instrument such as cost–benefit analysis or as the basis for market-style payments will inevitably result in confusion.

The matter can be further clarified by considering the nature of values and the value of nature. Commensurability is when there is a single measure of value by which things can be ordered. For strong commensurability, a directly comparable cardinal scale can be used, for example, in buying and selling or cost–benefit analysis. If this is not possible, but values can still be generated, then weak commensurability can be used to generate an ordinal scale for ranking options. However, if we cannot commensurate values, then there is incomparability and aggregation techniques such as cost–benefit analysis cannot be applied. The question then is – can environmental values be made to commensurate? Let us take an example to explain further. When establishing a protected area a management agreement is created with the landowner and payments made when the agreement is complied with. The objects of value covered by the agreement are the species on the site, which are part of our ‘common heritage’, and protected by what Sagoff (1998) calls a citizen’s preference that society should protect the species, i.e. they are covered by inalienable entitlements. It is possible to generate numbers for the value: the very existence of the species provides us with utility that can be used to generate payments and there may be direct use values from tourism. But these values are not used to compute the payments to the landowner; and society and the landowner do not bargain over the management plan to reach an optimal price based on supply and demand. Instead society recognizes the moral obligation placed on the landowner as a steward of our common heritage and compensates this through a payment based on an assessment of opportunity cost. Both the conservation agreement and the payment to the landowner are based on inalienable entitlements, but for two different moral reasons: protection of common heritage and compensation for societal obligation. There is no market for the value and there is no payment for ecosystem services.

Nonetheless, policy makers demand values, measures and indicators. There is much discussion of markets and direct payments for conservation. These approaches are now well embedded in the policy process. However, the interesting question is not ‘how much’ but how these values are actually used. In practice, they act as a social coordination device. An economist will provide a decision-making meeting with a value of ecosystem goods and services. The value sits on the table and the meeting will negotiate around it, in other words it coordinates the political discussions. It is the role of values in this process that it is of most interest in developing and influencing economic models and analyses of ecosystem functioning and ecosystem services.