Valuing ecosystem services-

advantages and disadvantages of

existing methodologies and
application to PES

Danièle Perrot-Maître

Seminar on environmental services and financing for the

protection and sustainable use of ecosystems
Geneva, 10-11 October 2005
 Outline of presentation
• Ecosystem goods and services
• Reasons to value ecosystem goods and
services
• Valuation methods: definition, examples,
advantages and disadvantages
• Applying valuation to PES design
• Key messages
 Ecosystems products and services
Products Functions/Services

• Food
• Fuel wood
• groundwater
Non-timber forest products
• Fisheries products
• Marine products
• Wetlands products
• Medicinal and biomedical products
• Forage and agricultural products
• Water
• Reeds
• Building material
Hydrological services
• Purification of water
• Capture, storage and release of surface and
• Mitigation of floods and droughts
Biodiversity
• Maintenance of biodiversity (plants and
animals)
Climate
• Partial stabilization of climate through carbon
sequestration
• Moderation of temperature extremes and the
force of winds and waves

Source: Adapted from Simpson (2001)

 Direct values
Outputs that can be consumed or processed
directly, such as timber, fodder, fuel, non-timber
forest products, meat, medicines, wild foods, etc.

Indirect values
USE Ecological services, such as flood control,

VALUES regulation of water flows and supplies, nutrient

retention, climate regulation, etc.

Option values
Premium placed on maintaining resources and
landscapes for future possible direct and indirect
uses, some of which may not be known now.

Existence values
NON-USE Intrinsic value of resources and landscapes,

VALUES irrespective of its use such as cultural, aesthetic,

bequest significance, etc.
 Why value?
• Understand how much an ecosystem contributes to economic
activity or society. For example, on average forests benefits in the
Med region amount to about 1% of GDP. Indirect use value such
as watershed protection contributes about 35% of total estimated
value.

• Understand what are the benefits and costs of an intervention that

alters the ecosystem (conservation investment, development
project, regulation or incentive) and make ecosystem gods and
services comparable with other investments

• How are costs and benefits of a change in ecosystem distributed?

• How to make conservation financially sustainable?

 Revealed Cost- Stated
Preference Based Preference
Methods Methods Methods
Surrogate
Market Price Productivity
Market
Method Approach
Approaches

Market Effect on Travel Replacement Contingent

Prices Production Costs Costs Valuation

Cost of
Conjoint
providing
Hedonic Analysis
substitute
Pricing
services
Choice
Damage cost Experiments
avoided
 Direct values
Market Prices
Goods and products
Productivity &
cost-based approaches
Effect on Production
Indirect values
Replacement Costs
Ecosystem services
Cost of Providing
Substitutes
Cost of Avoided
Damage
Option values Surrogate market & stated
Existence values preference approaches
Travel Costs
Direct values
Nature tourism Contingent Valuation
 Revealed Cost- Stated
Preference Based Preference
Methods Methods Methods
Production Surrogate
Market
Function Market
Prices
Approaches Approaches

Market Effect on Travel Replacement Contingent

Prices Production Costs Costs Valuation
Cost pf
providing Conjoint
Hedonic substitute Analysis
Pricing Services
Choice
Damage Cost
Experiments
Avoided
 MARKET PRICES
E.g. Nam Et & Phou Loei NBCA,
Lao PDR:
What it costs to buy Value of NTFP use for
or sell a good or Viengthong District villages
product
People’s actual Cash income $634,000
Plant foods $45,000
willingness to pay Wild meats $476,000
Fuel and housing $480,000
Crop consumption $241,000
TOTAL VALUE $1,876,000
 Advantages and Limitations of the Market
Price Method
+ Use if primary resource or ecosystem affected has a commercial market (for ex.
benefits of cleanup and closure of commercial fishing on fisheries). Prices, quantities
and cost are easy to obtain.

+ The method uses observed data of actual preferences

+ The method uses standard, accepted economic techniques (consumer and producer
surplus based on supply and demand curves) and is relatively easy to apply

– Seasonal variations and other effects on price have to be considered

– Usually the costs of transport to bring goods to the markets not included and benefits
may be overstated

– Many ecosystem goods and services do not have markets or markets are distorted or
not well developed and market prices do not always fully reflect the value of
ecosystem services to society (WTP)
 PRODUCTIVITY METHOD
Flood attenuation benefits from
The economic forests, Madagascar
Value of flood damage to paddy
contribution of production
ecosystems to other
production and
consumption NPV for forest watershed protection
activities benefits: $126,700.

Market value as an Resulted in the establishment of

input Mantadia NP
 Advantages and Limitations of the
Productivity Method
+ Methodology straightforward, data requirements are limited and relevant data
may be readily available hence methiod relatively inexpensive to apply

– Only resources and services that are marketed can be valued

– Most difficult aspect is to be able to quantify the biophysical relationship that

link changes in supply or quality of ecosystem services with environmental
changes or management options. Often use simplified assumptions.

– If changes in ecosystem affects market price, then the method is more

complicated and difficult to apply

– If changes are too drastic, users of ecosystem goods and services may switch
to other alternatives.
 TRAVEL COSTS

How much people USA, Value impacts of improved

environmental quality on
spend to use or freshwater recreation in the US
benefit from using
ecosystems for
recreational purposes
People’s implied Combined benefit of all freshwater-based
willingness to pay recreation: $37 billion/year
 Advantages and Limitations of the
Travel Cost Method

+ Limited to recreational values

– Requires complex statistical analysis, large and

complex data sets, hence expensive and time
consuming

– Likely to estimate value of one factor because

difficult to separate out effect of different factors
(lansdcape beauty and water)
 REPLACEMENT COSTS
E.g. Ream National Park,
The costs of replacing Cambodia:
an environmental Value of mangrove ecological
services (flood barriers,
good or service upstream erosion control)
A minimum estimate
of money saved
Storm protection $60,000
Silt trapping $220,000
TOTAL VALUE $280,000
 COSTS OF MITIGATING
ECOSYSTEM DEGRADATION
The costs of E.g. Thua Thien Hue, Vietnam:
Value of watershed catchment
mitigating or averting protection for urban and rural
the effects of the loss water supplies (Infrastructure to
of an environmental mitigate erosion, seasonal low
water supplies and flooding)
good or service
A minimum estimate
Investment costs $27 million
of money saved Recurrent costs $1.8 million
ANNUAL COST $2.88 million
 DAMAGE COSTS AVOIDED
E.g. Value of Phnom Bokor NP
The costs avoided for watershed protection and
from the destruction hydropower generation
of ecosystem
A minimum estimate
of money saved
Failure to invest in watershed management
as a component of dam maintenance could incur
NPC of over $2million in terms of power
revenues foregone
 Advantages of Cost-Based Methods
+ Particularly useful for valuing ecosystem services

+ Simple to apply and analyse (rely on 2dary data on benefits

from ecosystem services and cost of alternative). Easier to
measure costs of producing benefits than the benefits
themselves when goods and services are not marketed.

+ Particularly useful if time and financial resources for the study

are elimited or where it is not possible to carry out detailed
surveys

+ Approaches are less data and resource intensive whereas data

or budget limitations may rule out valuation methods that
estimate WTP
Limitations of Cost-Based Methods
– Provide only rough indicator of ecosystem value

– Replacement cost: often difficult to find perfect replacements

for ecosystems goods and services, hence valuation results
tend to undervalue ecosystem value

– Mitigation expenditures: often people’s perception of the

effect of ecosystem loss and what would be required to
mitigate these effects do not always match those of experts.

– Damage cost method: estimated damages avoided remain

hypothetical in most cases. Often difficult to relate damages to
changes in ecosystems
 CONTINGENT VALUATION
The amount people E.g. Doi Inthanon and Suthep
would pay/accept Pui National Parks, Thailand:
under the theoretical Willingness to pay for park entry
fees
condition that
biodiversity could be
bought and sold
Doi Inthanon 40 Baht per person
People’s stated Suthep Pui 20 Baht per person
willingness to pay TOTAL VALUE $1.2 million/year
 Advantages of CV
+ Very flexible. Can be used to estimate economic
value of about anything but best to use it to estimate
value of goods and services easily identified and
understood 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 research
is being conducted to improve the methodology,
make results more valid and reliable and understand
strengths and limitations
 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 how

survey 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 and

others do not believe the results of CV analysis
 LESS COMMON METHODS
Difference in (property or wage) prices that
Hedonic
can be ascribed to the existence or level of
Pricing nearby environmental goods and services.

Obtains information on preferences between

Conjoint
various alternatives of environmental goods
Analysis and services, at different price or cost.

Present a series of alternative resource or

Choice use options, each of which are defined by
Experiments various attributes including price.
Application of economic
valuation to PES design
Watershed services: supply and demand
Supply of services:
Upstream land uses affect the Quantity,
Quality, and Timing of water flows

Demand for services:

Possible downstream
beneficiaries:
• Domestic water use
• Irrigated agriculture
• Hydroelectric power
• Fisheries
• Recreation
• Downstream ecosystems
Source: World Bank 2003
 Applying ecosystem valuation to payment for
ecosystem service: simple in theory
Conservation
without
payment
Conventional
Minimum payment
resource use: willing to receive to
Conservation
no change damaging with payment
conservation behaviour to for service
ecosystem
Payment
Benefits to
producers

Costs to Maximum payment

offsite willing to pay to reduce
populations environmental damage
Source: Adapted from World Bank 2002
In practice, not so simple…
 In practice not so simple…
Complex biophysical linkages (Brand 2003)
In practice still not so simple…valuing effects of change
in ecosystem conditions on agricultural production

Reduced
Increase use fertiliser Increase production
pest-control &
& pesticides (in kg) costs (in US$)
pollination

Reduction in water:
floods & drought Change in Economic
Increase in crop Decrease in crop
Deforestation Value of Agriculture
damage (in kg) yield (in US$)
(in US$)
Increased erosion

Reduction of Increase in crop Increase in crop

forest cover production (in kg) yield (in US$)

Intervention Impact on ecological Physical impact of change Socio-economic effects Overall impact of
function & service in functions of physical impact Socio-economic effects
Use-and non use- of economic valuation to
design payments for ecosystem services

Public payments

• Costa Rica: $20-44/ha/yr for forest conservation- based on old subsidy

based on opportunity cost of land use change

• USA (Conservation Reserve Program): $50/ha/yr. Opportunity cost and

cost of conservation measures

• Ecuador: municipal water and electrical utility companies each donate

1% 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 total revenues
($2,500 per month) for the restoration and conservation of the Corumbatai
watershed. Funds are used to establish tree nurseries and for reforestation
along riverbanks. Payment is outcoem of political negotiation.
 Use-and non use- of economic valuation to
design 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 the Peñas
Blancas watershed

• Australia: Since 1999, farmers in the Murray Darling watershed pay

$AUD 85/ha/yr for forest conservation for 10 years or $AUD 17 per
million liters of transpired water. Based on increase in marginal
benefits due to reduced soil salinity resulting of 100 ha of reforested
area.
Concluding remarks
 Applicability and limitations of
economic valuation
• Economic valuation highlights costs and benefits and cost bearers and
beneficiaries that in the past have been ignored

• But for policy makers it may not, and probably will not be, the most
important factor. Ecosystem valuation only provides a set of tools with
which to make better and more informed decisions and is not a stand alone
exercise.

• Valuation is out of necessity partial. Case studies underestimate ecosystem

values at larger scale because the larger scale the more difficult it is to
replace the ecosystem goods and services and interactions are too complex
to understand impacts of alternatives .

• Some ecosystems will never be measurable or quantifiable because we do

not have the necessary scientific, technical or economic data.
 Applicability and limitations of
economic valuation
• When ecosystem benefits that relate to attributes such as human life,
cultural or religious significance, economic valuation raises serious ethical
questions. Ecosystem valuation may be dangerous when it focuses only on
financial or cash benefits at the expense of other types of values that
cannot-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 perception
of a particular group at one point in time and is not universally valid.

• There is no garantee that the findings of economic valuation will support

the wise use and management of ecosystems and their services. In fact the
use of valuation studies to identify and promote new ways of capturing
ecosystem values through markets or PES, can be a double-edged sword.
 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 decisions
which are about making incremental changes in these
flows.
 More key messages
• 1st. step: ask yourself what is the purpose of the
analysis, who should take its results into account

• 2nd. step: what is your budget, can it be adjusted, what

capacity is available, which time frame?

• 3rd. step: which process? Process may be as

important as the result. Consider stakeholders,
including policy makers, participation into the study.
 And more…
• In designing PES, the most appropriate method to
value an ecosystem service is the production function
analysis-yet it is rarely done

• Be pragmatic, learn and adapt: most payments based

on OC to service provided, not on marginal benefit to
beneficiary. Payments need not be cast in stone but
adapted 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 the
start. Hence back to step 1!
For further information: IUCN economic
valuation products
Toolkit Working Papers
& Policy Briefs

Case Studies
 For further information

Toolkit downloadable from:

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

New revamped website:

http://biodiversityeconomics.org
Thank you!