Imagine the following situation: a 6-year old approaches you holding in his hands a picture – he drew a dolphin. Then you see a number above the dolphin, with an €-sign at its end, and the child tells you that the dolphin costs this amount of money. When you ask him, however: Where does the number come from? Who is to pay this to whom? And what is the expected result of the transaction?, he knows no answer. This situation is not so much dissimilar from what sometimes happens when economists attempt to assign a value to ecosystems.
The so-called ecosystem services approach emerged in the middle of the 90’s as an interdisciplinary field connecting ecology, conservation biology and economics. The basic idea was that the reason why we should preserve natural systems is that they provide us with numerous “services”: from water purification, carbon sequestration, food and wood through more intangible services such as aesthetics or cultural artifacts. So, the reasoning goes, it is in our own interest to preserve Nature.
The ecosystem services framework from the Millennium Ecosystem Assessment.
However, there always are trade-offs involved. Some services are partly contradictory (e.g. wood vs. carbon sequestration or flood plains vs. agricultural land), there are disservices of ecosystems (e.g. when a wetland is the breeding area of vectors of diseases, such as malaria-bearing mosquitoes), and sometimes preserving an ecosystem may impose large (opportunity) costs over the involved communities. How should such trade-offs be evaluated? Here economists enter the picture and offer their expertise and tools. The idea is quite simple: since money is a common and well-understood “language” for expressing trade-offs in most societies, let us calculate the value of the services generated by an ecosystem under a certain use scenario, compare it with alternatives and choose the most beneficial one. In other words, it is about a cost-benefit analysis.
But is assigning monetary values to ecosystems that simple? Well, it is not. For some services, particularly those belonging to the “provisioning services” category, oftentimes have market prices, which are assumed to reflect their value for people. Most services, however, are not traded in markets. Their value has to be derived indirectly. Here, again, we distinguish two broad classes – some values, mostly called “indirect-use values”, can be deduced, at least in theory, from market prices of goods whose attributes depend on ecosystem services. For others, “hypothetical markets” have to be construed in questionnaires (“non-use values”). An example of the former approach is to compare real estate prices in areas differing with regard to proximity to a certain ecosystem (other attributes being controlled for). Meanwhile, non-use values are derived by asking people what they would be willing to pay for the protection/enhancement of an ecosystem.
You think these methods are strange and do no capture the real value of ecosystems? You are probably right. Indeed, the ecosystem services approach, and particularly its economic version, has been criticised for numerous reasons by many commentators. The most striking reason is of course the fact that there are values people hold for ecosystems that cannot be reduced to €- or $-numbers, since they are not believed to be subject of trade-offs (which actually is a conditio sine qua non for economic analysis). A prominent recent example are the Niyamgiri Hills in India, believed by the indigenous people of Dongria Kondh to be holy. A holy place has no potential substitute, and thus cannot have economic value.
Another problem of the economic approach is that it is too simplistic given the vast complexity of natural systems. The possibility of threshold effects, e.g., makes economic analysis futile. And even if there were none, which is a bold assumption in most cases, how should we ask people for their preferences for an ecosystem whose complexity is no well understood even by the ecologists who had studied it for years? And there are still many more caveats economists willing to assign values to ecosystems have to deal with: equity concerns, no agreement with regard to methodology, psychological constraints, double-counting issues, potential irreversibility of ecosystem changes, knowledge dynamics… (interested readers may look at my master’s thesis on these problems)
A common answer of economist to these criticism is that they are aware of the problems, but: a) we have no better means to cope with ecosystem degradation and b) the process of valuing is more important than the indeed questionable number that comes out as a final result.
The truth is that the long-standing struggle of environmentalists who have tried to convince people that Nature should be protected have sometimes been successful – but, overall, not successful enough. Can the economic valuation of ecosystems change that? The idea is to show decision makers that it is not only some green fools who think Nature is “great”, but that we are all benefiting from it. The hope is that quantification of the benefits we derive from ecosystems will convince the broad public. However it still has to be shown that the ecosystem services approach really does make a difference.
With regard to the contention of many researchers that the exact €-/$-values that can be found in the tables of their publications are not the most important part of the valuation process and that they should not be taken at face value, one is tempted to ask: why do you publish those values then? If you do not really believe that they are right, do we really need them? Furthermore, this may be a kind of an Oppenheimer fallacy: the researcher may know that it is not mainly the numbers that count. But do media and politicians and the broader public know that? If they ever report of a valuation study, media more often than not focus the entire attention on exactly those $ values most researchers deem not so important. When Robert Costanza and others published in 1997 a famous article in which they calculated the value of the world’s ecosystems to be 33 billion USD, media picked up this number only. And it is still being cited frequently. But this estimate has been heavily criticised even within the community of environmental economists. Apparently, however, numbers are more “sexy” than the disagreements of researchers regarding their source. Thus, the question emerges whether it is not naive to engage in economic valuation of ecosystem services despite knowing all the caveats and the way modern media deal with information.
Should we attach monetary values to Nature, then? I don’t know. So far I have tended to a paraphrase of Churchill’s famous expression about democracy: the economic approach is bad, but we do not have anything better to offer. But is some number really better than no number, as Peter Diamond and Jerry Hausman once asked? I am not longer sure it is.
P.S. The situation described in the introduction actually took place a few days ago. I’ve never told my son that part of my work is assigning monetary values to Nature, I have always let this out. How he came upon the idea, I do not know.
The Sceptical Economist 