This presentation includes slides from the World Resources Institute publication Ecosystem Services: A Guide for Decision Makers and a presentation by Stephen Polasky,

Professor, University of Minnesota

The Economics of Sustainability: Ecosystem Services

Elena IrwinProfessor

Department of Agricultural, Environmental and Development Economics

Ohio State University

• New York City

• Western China

• Thailand

What do they have in common?

3 cases from the field

Ecosystem Services: A Guide for Decision Makers

Water quality in New York City• Ninety percent of NYC’s drinking water is drawn from sources in the

Catskill Mountains and the headwaters of the Delaware River where it filters through nearly 1,600 square miles of watershed land

• Early 1990s: Degradation of watershed threatened drinking water for 9 million people

• Construction costs of a new water filtration plant estimated at $6 billion with $30 million annual operating expenses

Ecosystem Services: A Guide for Decision Makers

Food production in China• 1950s: Shiyang River diverted to form the Hongyashan Reservoir

(Minqin County) to support agriculture• River has dried up, no more reservoir, groundwater will be depleted in

another 17 years• Desert is encroaching on Minqin at rate of 10 meters/year• Desertification costs China $2-3 billion each year

Ecosystem Services: A Guide for Decision Makers

Shrimp farming in Thailand• Global shrimp production has grown at a rate of 10–20 percent per

year in last 5-10 years• Shrimp aquaculture: low-cost shrimp• Mangroves (coastal wetlands that flood w brackish water) are ideal for

aquaculture sites, but also provide habitat to native fish and storm protection

• Productive life of a shrimp farm in Thailand is 5 years on average

• Changes were made to the management of ecosystems

• These changes created unexpected costs to those dependent on nature’s services

• Some gained from the changes, but many more lost

• Most often, the economic gains are easy to see, but the ecological losses are “invisible” in the marketplace

What do these 3 cases have in common?

What’s needed, why and how?

• What: – Increased provision of ecosystem services and

reduced human impacts on ecosystems

• Why– To improve human well-being (become more

sustainable) by increasing our total wealth

• How – Account for the value of nature’s services– Provide the right incentives by developing markets for

ecosystem services

Ecosystem Services: A Guide for Decision Makers

Understand the link between ecosystems and human well-being

Humans impact nature

Nature impacts human well-being

A few definitions

Ecosystem

Ecosystem services

• The benefits people obtain from ecosystems

• The “services of nature”

• A dynamic complex of plant, animal, and micro-organism communities and the non-living environment interacting as a functional unit

Biodiversity • The variability among living organisms within species and populations, between species, and between ecosystems

• Serves as the foundation for all ecosystem services

Natural Capital

• Physical assets generated by nature that provide ecosystem services

Millennium Ecosystem Assessment

• Largest assessment of the health of Earth’s ecosystems,, including trends, drivers, impacts and future scenarios

• Called for by UN Secretary General in 2000

• Partnership of UN agencies, conventions, business, non-governmental organizations with a multi-stakeholder board of directors

• Prepared by 1360 experts from 95 countries

Ecosystem Services: A Guide for Decision Makerswww.MAweb.org

RegulatingBenefits

obtained from control of natural

processes by ecosystems

CulturalNon-material

benefits obtained from

ecosystems

Provisioning

Goods produced or provided by ecosystems

3 categories of ecosystem services

Capture fisheriesWild foodsBiomass fuelGenetic resourcesBiochemicalsFresh water

Air quality regulationClimate regulationErosion regulationWater purificationPest regulationPollinationNatural hazard regulation

Spiritual valuesAesthetic values

What do we know about the status of the world’s ecosystem services?

Degraded EnhancedMixed

Provisioning

Cultural

Regulating

CropsLivestockAquaculture

Carbon sequestration

TimberFiber

Water regulationDisease regulation

Recreation & ecotourism

What do these ecosystem

services have in common?

Ecosystem Services: A Guide for Decision Makers

What’s driving ecosystem change?

Direct drivers • Physical changes that can be identified and monitored

• Alter the level or rate of change of one or more direct drivers

Indirect drivers

Ecosystem Services: A Guide for Decision Makers

• Habitat Change

• Pollution

• Climate change

• Invasive Species

• Overexploitation

Direct drivers of ecosystem change

Impact is incrasing Impact is at a constant rate Impact is decreasing

Habitat change

Climate change

Invasive species

Over- exploitationPollution

Temperate Grassland

Tropical grassland and savanna

Desert

Mediterranean

Island

Mountain

Polar

Inland water

Coastal

Marine

Boreal forest

Temperate forest

Tropical forest

Trends in direct drivers

Ecosystem Services: A Guide for Decision Makers

• Demographic

• Economic

• Sociopolitical

• Science and technologies

• Cultural and religious

Indirect drivers of ecosystem change?

Enhancement of some market-based ecosystem services often leads to degradation of others winners and losers

Tradeoffs Trade-offs

• Trade-offs occur because the same land area (or water body) produces both economic benefits and non-market ecosystem services that compete with (rather than complement) each other

• Synergies may be possible at a local scale• However, at an aggregate level, there is a fundamental trade-off between economic growth

and the environment

Why value nature?

• TED talk: Pavan Sukhdev: Put a value on nature!– http://www.ted.com/talks/pavan_sukhdev_what_s_the_

price_of_nature.html

• The Economics of Ecosystems and Biodiversity (TEEB) Report, including the TEEB for Business report

• Questions to think about as you watch this:– Why should society value ecosystem services?

– Why should businesses value ecosystem services?

The main issues

1. Valuation: how can we assess the relative value (importance) of various ecosystem services?

– Environmental economics: Methods to estimate the values of non-market ecosystem services to humans

– Inclusive wealth accounting: National accounts that assess value of all forms of capital (produced, human, natural, social)

The main issues

2. Incentives: how can we provide rewards for providing ecosystem services?

– Markets for ecosystem services, e.g., PES (payments for ecosystem services) = incentives for individuals and firms to provide ecosystem services

– Markets for ecological damages = incentives for, e.g., carbon tax, cap-and-trade, impervious surface fee = individuals and firms to reduce impacts

Types of environmental values

Use values refer to the utility arising from direct or indirect physical use of a resource including commercial use, recreational use, and aesthetic use:

» Direct use values are private benefits that are derived from resource consumption and contribute to resource depletion. Examples are farming, forestry, fishing, grazing, hunting, mining.

» Indirect use-values are generally public good benefits that do not contribute to resource depletion. Examples are swimming, boating, hiking, camping, viewing wildlife, observing scenic forests, mountains, rivers, waterfalls, etc.

» Option value arises in situations where depleting a resource would be an irreversible action. It is derived from maintaining the option to utilize it in the future. For example, extinct plants could have medicinal value that can not be discovered anymore.

• Non-use values refer to utility that is derived from environmental resources without physical interaction with the resource:

» Bequest value refers to utility derived from passing an environmental resource on to children and/or future generations.

» Existence value, or inherent benefits refer to utility derived from the knowledge of the mere existence of environmental resources. You might never see many of the endangered species but you might still value their existence.

Types of environmental values

Total Economic Value =

Direct Use Values + Indirect Use Values + Non-Use Values

Techniques for measuring the value of non-market goods

The three major categories for measuring the value of non-market goods include:

• Revealed preference techniques, which look at decisions people make in reaction to changes in environmental quality.

• Stated preference techniques, which elicit values directly through survey methods.

• Benefits-transferred techniques, which look at existing studies for value of analogous environmental change.

Techniques for measuring the value of non-market goods

• Revealed preference = Market based methods (linking information from markets to environmental cost or demand)– Production function approach– Cost of illness approach– Cost-based approaches– Travel cost method– Hedonic pricing model

• Stated preference = Non-market based methods (survey methods that elicit hypothetical values)– Contingent valuation– Conjoint analysis

Blue-green Algae Bloom circa 1970, Lake Erie

““I heard Lake Erie is the place fish I heard Lake Erie is the place fish go to die.” -- Johnny Carson, 1976go to die.” -- Johnny Carson, 1976

Example: Lake Erie

Lake Erie Today: Amenity-Driven Growth

Research Questions

• Do changes in the water quality of Lake Erie affect the value of houses in the region?

• How important is water quality relative to other factors that influence housing values?

• What is the estimated benefit (in dollars) of an improvement in water quality to homeowners?

Method: Hedonic Price Model

• Sales price is decomposed into a series of “implicit prices” that represent the marginal contribution of each attribute to overall price

• For example:

Housing pricei = p1*(Sizei) + p2*(School qualityi) p3*(Access to worki) + p4*(Access to lakei) + p5*(Water qualityi)

• Interpretation of pi = implicit price of X = the change in housing price given a marginal change in X

– For example, p5 = the change in housing price given a an increase in water quality

Measuring Water Clarity: Secchi Disk Depth

http://lakes.chebucto.org/DATA/PARAMETERS/SD/sd.html

http://www.ecy.wa.gov/programs/wq/plants/management/joysmanual/secchi.html

Results: Mean Benefits to Homeowners from Improved Water Clarity

Actual secchi disk depth mean for region = 221.3 cm

Providing incentives for ecosystem services and conservation

• Demonstrating the value of ecosystem services is important: this can improve human decisions

• BUT, valuation by itself does not guarantee better decisions: this depends on the incentives that the decision-maker is facing (their own benefits and costs)

• Unless there is some form of reward for the provision of ecosystem services, the private landowner or firm may make a choice that generates too much environmental pollution or ecosystem destruction

Payments for ecosystem services (PES)

• PES = benefit (cash or other) provided to purchase one or more ecosystem services or products

• Effective markets require secure property rights, sufficient demand and supply, access to information for all stakeholders, established legal institutions.

• Markets for ecosystem services are based on these principles of a well-functioning market

– Sellers are landowners that provide clean air, clean water, wildlife habitat by sustainably managing their forests, wetlands, grasslands.

– Buyers of these goods and services are power plants, water treatment facilities, developers, and others who invest in conservation

Ecosystem Services: A Guide for Decision Makers

The problem of incentivesExample: pasture versus forest

Benefits to private

landowner

Costs to downstream

populationand others

Conversion to pasture

Forest conservation

Carbon emissions

Reduced H2O services

Loss of biodiversity

Source: Engel, Pagiola & Wunder, 2008

Problem: costs > benefits, and forest conservation not profitable !

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Profits from livestock Profits from

forest

The logic of PES

PaymentsBenefits to

private landowner

Costs to downstream

populationand others

Conversion to pasture

Forest conservationwith ES payments

Reduced H2O services

Loss of biodiversity

Min. payment

Max. payment

Payment for service

Carbon emissions

Source: Engel, Pagiola & Wunder, 2008

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Profits from livestock Profits from

forest

Distribution of PES schemes in 2007

Source: adapted from USAID 2007, PES Sourcebook

In total 145 PES schemes, 15 with unclear status (excluded in graph)

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Ecosystem Services: A Guide for Decision Makers

• New York City negotiated a combination of land acquisition and management agreements with other landholders to protect the watershed at a total cost of $1.5 billion,

• The payment for the natural water purification services also provides carbon storage and recreational and cultural services at no additional cost.

Elena IrwinProfessor

Department of Agricultural, Environmental and Development Economics

Ohio State University

irwin.78@osu.edu

Ecosystem Services: A Guide for Decision Makers