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Limitations of Cost-Based Methods Provide only rough indicator of ecosystem value

Replacement cost: often difficult to find perfect replacementsfor ecosystems goods and services, hence valuation results

tend to undervalue ecosystem value

Mitigation expenditures: often peoples perception of theeffect of ecosystem loss and what would be required tomitigate these effects do not always match those of experts.

Damage cost method: estimated damages avoided remainhypothetical in most cases. Often difficult to relate damages tochanges in ecosystems


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CONTINGENT VALUATION

The amount peoplewould pay/accept

under the theoreticalcondition that

biodiversity could bebought and sold

Peoples statedwillingness to pay

E.g. Doi Inthanon and SuthepPui National Parks, Thailand:Willingness to pay for park entryfees

Doi Inthanon 40 Baht per personSuthep Pui 20 Baht per personTOTAL VALUE $1.2 million/year


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Advantages of CV

+ Very flexible. Can be used to estimate economicvalue of about anything but best to use it to estimatevalue of goods and services easily identified andunderstood by users

+ CV is the most widely accepted method for estimating TEV including non use, option and

bequest values (only method to estimate option or existence values)

+ CV has been widely used and a great deal of researchis being conducted to improve the methodology,make results more valid and reliable and understandstrengths and limitations


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Limitations of CV Whether CV really measures WTP still controversial (most people unfamiliar making choices about ecosystem services)

Results highly sensitive to design of choice scenarios and howsurvey conducted (psychological aspects)

WTP sensitive to payment vehicle (WTA compensation)

Strategic bias to influence outcome

Non response bias

Many people including jurists, policy makers, economists andothers do not believe the results of CV analysis


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LESS COMMON METHODS

HedonicPricing

Conjoint Analysis

ChoiceExperiments

Difference in (property or wage) prices thatcan be ascribed to the existence or level of nearby environmental goods and services.

Obtains information on preferences betweenvarious alternatives of environmental goodsand services, at different price or cost.

Present a series of alternative resource or use options, each of which are defined byvarious attributes including price.


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Application of economicvaluation to PES design


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Watershed services: supply and demand

Supply of services:Upstream land uses affect the Q uantity ,Q uality , and Timing of water flows

Demand for services:Possible downstreambeneficiaries:Domestic water useIrrigated agriculture

Hydroelectric power FisheriesRecreationDownstream ecosystems

Source: World Bank 2003


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A pplying ecosystem valuation to payment for ecosystem service: simple in theory

Benefits toproducers

Costs tooffsitepopulations

Conventionalresource use:

noconservation

Conservationwith payment

for service

Payment

Conservationwithout

payment

Minimum paymentwilling to receive tochange damagingbehaviour toecosystem

Maximum paymentwilling to pay to reduceenvironmental damage

Source: A dapted from World Bank 2002


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In practice, not so simple


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In practice not so simple

Complex biophysical linkages (Brand 2003)


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In practice still not so simplevaluing effects of change

in ecosystem conditions on agricultural production

Impact on ecological function &service

Physical impact of changein functions

Socio-economic effectsof physical impact

Overall impact of Socio-economic effects

Intervention

eduction in ater:floods &drought

Increased erosion

Increase in cropdamage ( in kg )

ecrease in cropyield ( in US$)

Increase use fertiliser &pesticides ( in kg )

Increase productioncosts ( in US$)

Increase in crop production ( in kg )

Increase in cropyield ( in US$)eduction of forest cover

educed pest-control &

pollination

eforestationhange in conomicalue of griculture

(in US$)

Impact on ecological function &service

Physical impact of changein functions

Socio-economic effectsof physical impact

Overall impact of Socio-economic effects

Intervention

eduction in ater:floods &drought

Increased erosion

Increase in cropdamage ( in kg )

ecrease in cropyield ( in US$)

Increase use fertiliser &pesticides ( in kg )

Increase productioncosts ( in US$)

Increase in crop production ( in kg )

Increase in cropyield ( in US$)eduction of forest cover

educed pest-control &

pollination

eforestationhange in conomicalue of griculture

(in US$)


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Use-and non use- of economic valuation todesign payments for ecosystem services

Public payments

Costa Rica : $20-44/ha/yr for forest conservation- based on oldsubsidy based on opportunity cost of land use change

USA (Conservation Reserve Program): $50/ha/yr. Opportunity costand cost of conservation measures

Ecuador : municipal water and electrical utility companies each donate1% of total revenues for watershed protaction (oroginally 5% had been

proposed by TNC)

Brazil a water utility in the city of Sao Paulo pays 1% of totalrevenues ($2,500 per month) for the restoration and conservation of theCorumbatai watershed. Funds are used to establish tree nurseries andfor reforestation along riverbanks. Payment is outcoem of politicalnegotiation.


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Use-and non use- of economic valuation todesign payments for ecosystem services

Private payments

France : US$320/ha/year for 7 years, equivalent to 75% of farm income Opportunity cost and actual cost of switching

agricultural technology

Costa Rica : a hydropower company pays US$10 per ha/year to a local conservation NGO for hydrological services in thePeas Blancas watershed

Australia : Since 1999, farmers in the Murray Darlingwatershed pay $AUD 85/ha/yr for forest conservation for 10years or $AUD 17 per million liters of transpired water. Basedon increase in marginal benefits due to reduced soil salinityresulting of 100 ha of reforested area.


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Concluding remarks


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Applicability and limitations of

economic valuationWhen ecosystem benefits that relate to attributes such as human life,cultural or religious significance, economic valuation raises serious ethicalquestions. Ecosystem valuation may be dangerous when it focuses only onfinancial or cash benefits at the expense of other types of values thatcannot-or should not-be valued.

Results of ecosystem valuation studies are not definitive, and transferable between groups and locations. They are generally based on the perceptionof a particular group at one point in time and is not universally valid.

There is no garantee that the findings of economic valuation will supportthe wise use and management of ecosystems and their services. In fact theuse of valuation studies to identify and promote new ways of capturingecosystem values through markets or PES, can be a double-edged sword.


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Key Messages

It is easy to spend tons of money on valuation.

It is easy to value everything, yet the results of valuation are not always useful or correct.

Info on total benefit flows, even if correct, cannot provide guidance on specific conservation decisionswhich are about making incremental changes in theseflows.


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More key messages

1st. step: ask yourself what is the purpose of theanalysis, who should take its results into account

2nd. step: what is your budget, can it be adjusted, whatcapacity is available, which time frame?

3rd. step: which process? Process may be asimportant as the result. Consider stakeholders,including policy makers, participation into the study.


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And moreIn designing PES, the most appropriate method tovalue an ecosystem service is the production functionanalysis-yet it is rarely done

Be pragmatic, learn and adapt: most payments basedon OC to service provided, not on marginal benefit to beneficiary. Payments need not be cast in stone butadapted as more is learned about the system,especially biophysical relationships.

Economic valuation will only address equity issue if this is designed into the valuation study from thestart. Hence back to step 1!


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For further information: IUCN economicFor further information: IUCN economicvaluation productsvaluation products

Working Papers& Policy Briefs

Toolkit

Case Studies


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For further information

Toolkit downloadable from:

http://www.waterandnature.org/value /

New revamped website:

http://biodiversityeconomics.org


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Thank you!

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