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Pricing (Nonmarket) Ecosystem Services: The Dream (Part I)

[Editor note: Last month, a conference--"Evaluating and Trading Ecological Services: Is There a Role for Natural Capital in the Marketplace?”--was held in Houston, Texas. Local environmental activist Jim Blackburn organized the event (interviewed here). Appendix A describes the conference, and Appendix B lists the sessions.

Without a speaker challenging the premise of the conference, MasterResource asked Sterling Burnett of the National Center for Policy Analysis to provide this analysis, which will be forwarded to conference organizers.]

Pricing nonmarket ecosystem services may be a noble goal. But it is conceptually confused and problematic as a guide to real-world action, civic and certainly governmental.

This four-part series substantiates my concerns. After reviewing the general concept, I will examine environmentalist concerns with environmental commodification, review economist concerns with the same, and make final arguments and wrap-up.

Background

In 2001, I defended my doctoral dissertation, Protecting Ecosystemic Goods: The Pro’s and Con’s of a Property Rights Approach. My dissertation argued that assigning property rights and allowing markets to develop around the valuation and trade of ecosystemic good (species, habitats and their interrelations) would

    1. Result in more environmental protection and promotion than most environmentalists would believe and
    2. Be superior to the protection provided by federal and state governments through laws and regulations.

Thus my contribution was well within the paradigm known today as free-market environmentalism.

At the same time as I was writing my work, environmentalists and academics from the relatively new field of environmental economics were beginning to develop (after a couple of fitful starts in earlier decades) the idea that ecosystems provide a variety of services, without which civilization and even humanity would fade from the scene.

Of course, there is no doubt this is true, but it, as stated, is not groundbreaking news or particularly helpful with regards to shaping economic or environmental policy. Recognizing this, the scholars went further, and argued that dollar values could be placed on the services nature provides and as a result wiser development decisions could be made in the future.

It is here that serious issues are raised that brings the entire effort into question.

The Quest

Nature provides a number of services from which humanity benefit greatly (water filtration, oxygen production, erosion control, waste treatment, food production and genetic resources and pollination, etc…). Since these goods haven’t been monetized historically, how can the benefits be calculated? And should they be given the inherent analytical errors and public-choice barriers?

The problem is that ecosystem services are “public goods” that are not traded in commercial markets because no one can be excluded from using them, and one person’s use of the good does not diminish the amount available to others. Some examples. The air is there for all to breathe; bees and other insects and birds worked their magic long before cities arose; and soil is formed and everyone benefits.

Having said this, human in pursuit of their welfare have altered the background environment in numerous ways, some enhancing the natural productivity or improving the lot of some species at the expense of others, some reducing the services nature provides and in the extreme altering local environments to such a degree that many ecosystem services have been supplanted almost entirely by manufactured replacements.

Why Price—and How?

The argument made by those promoting the economic valuation of ecosystem services is that knowing such value, will at least allow us to appreciate their worth. Prices would allow fully informed decisions concerning the opportunity costs or trade-offs involved when one is weighing policies, which could continue or improve the provision of environmental services when compared to the benefits from an action or activity that would reduce those services.

Such an apples-to-apples comparison integrates the values of ecosystem services into the market helps people to realize the full costs and benefits of production and consumption decisions.

Most environmental economists argue that ecosystem services are vastly undervalued (which is not surprising since they are public goods), and that when the true value is known, the world’s governments will commit far more resources into environmental protection, and undertake less intensive human development that expands into currently undeveloped areas or disrupts natures background functions.

Relatively few of the articles written on valuing ecosystem services or goods actually try and derive a measurable value, rather they try and develop the concepts and necessary background conditions for such measurements or the types of models and differing approaches used to derive the value ecosystem services and then provide a couple examples to show how in narrow cases markets have recognized and ultimately monetized ecosystemic values successfully.

In one of the most influential and widely cited papers that in the field that attempted a global estimate of the value of ecosystem goods, Robert Costanza, et. al, The Value of the World’s Ecosystem Services and Natural Capital, calculated the current economic value of 17 ecosystem services for 16 biomes, based on published studies and a few original calculations.

For the entire biosphere, the ecological value, most of which is currently outside the market, is is estimated to be between $16 and $54 trillion (2012$) per year, with an average of $33 trillion per year. He believes this is a minimum estimate based on “uncertainties” and compares this to a global gross national product of around $18 trillion per year.

Others have followed in Costanza’s footsteps, but none are as regularly cited and, regardless of the author, all claimed value of the have been substantial.

The effort of Costanza, and other economists, scientists and environmentalists, to place a value on ecosystem services and thus bring them into the market economy has been both praised and criticized within the wider community of environmentalists, scientists and economists. The praise as well as the blame has come from both the left and the right of the public policy spectrum.

Praise from the right generally takes the form of pointing out that since decisions will be made with regard to natural resources, it is better to understand their value and the opportunity costs involved in altering them for some other purpose, than it is to make such decision ignorant of such values.

They argue that doing a cost-benefit comparison, which can only be done fairly if a value is attributed to environmental services, should improve the public policy decisions. Pete Geddes, Skaidra Smith-Heisters and Holly Fretwell, though with reservations due to the difficulty of such calculations, have all endorsed that view.

On the left, proponents of estimating monetary values for ecosystem services follow the logic of Costanza’s article, to wit:

For proponents, the logic is straightforward: Old-style protection of nature for its own sake has badly failed to stop the destruction of habitats and the dwindling of species. It has failed largely because philosophical and scientific arguments rarely trump profits and the promise of jobs. And conservationists can’t usually put enough money on the table to meet commercial interests on their own terms.

Pointing out the marketplace value of ecosystem services was initially just a way to remind people what was being lost in the process — benefits like flood control, water filtration, carbon sequestration, and species habitat.

Then it dawned on someone that, by making it possible for people to buy and sell these services, we could save the world and turn a profit at the same time.

But what is wrong with this vision? [To be continued]

——————–

Appendix A: Conference Invitation, “Evaluating and Trading Ecological Services: Is There a Role for Natural Capital in the Marketplace?”

You are cordially invited to a day of presentations and discussion about ecosystem services co-sponsored by the Rice University SSPEED Center, The Nature Conservancy, the Natural Capital Project and the National Parks Conservation Association. Please RSVP to Jim Blackburn ASAP (dalecordray@blackburncarter.com) and let us know if you are coming. Seating for the conference will be filled on a first come, first serve basis. Lunch will be provided.

The benefits provided by nature are important and contribute significantly to the wellbeing of the Upper Texas Coast on many levels. From storm protection, to supporting multi-billion dollar marine industries, to drawing corporations and skilled talent, to so much more, these “ecosystem services” or “natural capital” provide the foundation for a resilient coastal economy. Great strides in science now allow for the quantification of these benefits. This symposium will discuss the benefits and emerging markets around natural capital/ecosystem services.

The Natural Capital Project (a partnership among Stanford University, The University of Minnesota, World Wildlife Fund, and The Nature Conservancy) has been studying ecosystem services on the Texas coast. With funding from NOAA, the Natural Capital Project and The Nature Conservancy of Texas are assessing the capacity of natural habitats to provide a suite of benefits to communities.

The project aims to increase our understanding of natural capital and how it contributes to building a resilient coast. Results from this project will include information for stakeholders and decision-makers about the benefits provided by the green infrastructure around Galveston Bay as well as practical, easy to use, open-source tools for assessing how changes in management and climate are likely to lead to changes in ecosystem services.

[Following the symposium, there will be a 2-day training for those interested in learning how to use the Natural Capital Project’s ecosystem service assessment tools.]

At SSPEED Center at Rice University, we are exploring and advancing the private sector, market-driven approach to ecosystem service credits and how they can be used to advance coastal resilience and conservation goals, as well as to support traditional land uses such as farming and ranching and to promote open space. Indeed, an ecosystem services exchange, similar to a stock exchange, would be a breakthrough concept in coastal and Texas-wide conservation.

Although ecosystem service credits have often been linked to regulation in the past, we are working to develop a free market for these services outside the regulatory process. This market could help sustain the long-term economic resilience of the Upper Texas coast while also conserving its natural capital for the benefit of generations to come.

- Jim Blackburn, Co-Director of SSPEED Center, Rice University jbb@blackburncarter.com

- Jorge Brenner, Ph.D., Associate Director of Marine Science, The Nature Conservancy of Texas jbrenner@tnc.org

 

Appendix B: “Evaluating and Trading Ecological Services: Is There a Role for Natural Capital in the Marketplace?”

June 19, 2013 Duncan Hall, Main Conference Room, Rice University

8:30 – 8:45 a.m. Welcome and Introductions

- Phil Bedient, Ph.D., Co-Director SSPEED Center, Rice University
- Jorge Brenner, Ph.D., Associate Director of Marine Science, The Nature Conservancy
- Victoria Herrin, Campaign Director, Texas Gulf Coast, National Parks Conservation Association

8:45 – 10:15 a.m. Why an Ecosystem Services Approach?

“Nature’s Benefits and Conservation in the Texas Coast” (John Herron, Director of Conservation and Science, The Nature Conservancy)

“The Natural Capital Project: Approaches and Tools for Putting Ecosystem Services into Action” (Lisa Mandle, Ph.D., Ecosystem Services Scientist, Natural Capital Project)

“Ecosystem Services and Water Management in Florida” (Lynn Scarlett, Resources for the Future)

“The Nation’s First Wetland Carbon Methodology: Restoring Wetlands in the Gulf Coast” (Sarah Mack, Ph.D., Tierra Resources)

10:30 a.m. – 12:00 p.m. Ecosystem Service Project Concepts from the Texas Gulf Coast

“Assessment of Ecosystem Services in Galveston Bay Area Using InVEST Models” (Jorge Brenner, Ph.D., Associate Director of Marine Science, The Nature Conservancy, and Greg Guannel, Ph.D., Post-Doctoral Scientist, Natural Capital Project)

“Incorporating the Value of Nature into Business Decisions” (Sheila Walsh, Ph.D., Ecosystem Services Scientist, The Nature Conservancy)

“Tradeoffs of Ecosystem Services from Wetlands in the Houston Region” (Jim Lester, Ph.D., President, Houston Advanced Research Center)

“Ecosystem Services: From Practice to Action” (David Yoskowitz, Ph.D., Endowed Chair of Socioeconomics at Harte Research Institute for Gulf of Mexico Studies, and Professor of Economics at Texas A&M University-Corpus Christi)

1:00 – 2:30 p.m. Design of An Ecosystem Services Exchange for Texas Gulf Coast

“Non-structural Flood Control and the Potential Role of Ecosystem Services,” (Jim Blackburn, Co-Director SSPEED Center, Rice University)

“Conceptual Design of An Ecological Services Exchange for the Texas Gulf Coast” (Adam Davis, Ecosystem Investment Partners)

“Measuring Ecological Benefits for Exchange Transactions” (Kevin Halsey, EcoMetrix Solutions Group)

“Establishing Market Infrastructure” (James Remuzzi, Sustainable Solutions)

2:45 – 4:15 p.m. Overview of Private Sector Involvement in Ecosystem Services Trading

“The Landowner, The Corporation and The Consumer – A New Paradigm” (Elizabeth Winston Jones, NPCA)

“Private Farm and Ranch Representative: An Overview of the Challenges to Texas Coastal Ranching and Farming and the Potential Role of Ecosystem Services” (Elizabeth Winston Jones, NPCA)

“Market-based Approaches to ESA and Other Mitigation Challenges” (Katharine Armstrong, President, Natural Resource Solutions)

“Private Sector and the Endangered Species Act” (David Wolfe, Environmental Defense Fund)

“A Breakthrough Collaboration: The Economics of Ecosystems” (Mark Weick, DOW Chemical Company)

3 comments

1 Lloyd Bentsen IV { 07.12.13 at 10:19 am }

Pricing ecosystems sounds like a huge undertaking either in the hands of the government or individuals. It could be worth trying if save the world and make money doing it, actually works.

2 Andrew { 07.12.13 at 10:30 am }

Great piece. Not many give thought to the problems of creating pricing values to ecosystem commodities. Who is to render the services, have control of these commodities and who will be stripped away from their land or forced to produce and what damage may that have on the ecosystem? Many caveats to consider to what some consider a “no-brainer.”

3 Jemma { 07.14.13 at 2:40 am }

Looking forward to following this interesting and complex topic. This discussion is not as straight forward as some would suggest it appears. I commend Mr Burnett for addressing it. My interest – when you put a price on a ecosystem service, what are you actually pricing – the provision of the service? The service itself? The right to use the service? The right to protect the service? This might seem inconsequential – until you try to trade it. Or legislate it in a climate of already-existing legislation, and competing political will.

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