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Valuation Emily McKenzie 2 April, InVEST Introductory Seminar, Bangkok.

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Presentation on theme: "Valuation Emily McKenzie 2 April, InVEST Introductory Seminar, Bangkok."— Presentation transcript:

1 Valuation Emily McKenzie 2 April, InVEST Introductory Seminar, Bangkok

2 2 “Almost all economists are intellectually committed to the idea that things people want can be valued in dollars and cents… Most environmentalists not only disagree with this idea, they find it morally deplorable… Yet, the fact remains that difficult choices must be made.” (Economist, 2002)

3 Moratorium on dredging in RMI Source: McKenzie et al Damage costs of near-shore dredging in terms of coastal protection losses were estimated at US$52 per m 3. This was much higher than the US$36 per m 3 off-shore.

4 Concept of valuation Reasons people use valuation Methods that are commonly used NatCap approach to valuation Outline

5 5 Valuation Ecosystem services are scarce and valuable Often no markets or prices exist for ecosystem services Valuation makes value of environment explicit Valuation techniques based on human decisions Requires biophysical modeling

6 Nature supports livelihoods and economies in countless ways. Biosphere worth US$33 trillion/year Costanza et al Mangroves worth more than shrimp farms Barbier 2007 Examples

7 avoided damage to property ($) Nature supports livelihoods and economies in countless ways. Another Example loss of public & private property ($)

8 To assess the value of the total flow of benefits from ecosystems; To evaluate the net benefits of an intervention that alters ecosystem conditions; To determine how the costs and benefits of ecosystem conservation are distributed; and To identify beneficiaries to ascertain potential funding sources for conservation. Why Value ES? Pagiola, von Ritter & Bishop 2004

9 Environmental & social benefits (in $) Financial costs (in $) Financial benefits (revenues) (in $) Financial costs (in $) Environmental & social benefits (in $) Financial benefits (revenues) (in $)

10 Assessing the economic value of ecosystem services. – This can be a $ amount or another type of metric – Price ≠ value What is valuation?

11 Value of ecosystem services In economics, value is defined as welfare (wellbeing). ‡ price Value of ecosystem services depends on human welfare derived from nature. Welfare is traditionally measured in terms of currency The substitution between money and the quantity/quality of ecosystem services can be expressed as willingness to pay (WTP) or willingness to accept (WTA) compensation StructuresValuesServices Functions

12 Total economic value Total Economic Value Use value Non-use value Direct use value Indirect use value Option value Existence value Example: -Timber -Recreation Example: -Water purification -Carbon sequestration Example: - Soil fertility -Biodiversity Example: - Rare species Pagiola et al, 2004

13 Direct Use Value: Value from direct human use of natural resources. – Extractive Use Value e.g. timber, fisheries – Non-Extractive Use Value e.g. recreation, tourism, education Indirect Use Value: Ecological functions that indirectly provide support and protection. – e.g. erosion and flood protection, water purification, carbon sequestration Use Values in TEV

14 Value based on intangible human benefits or non-use. – Existence Value: Value from simply knowing that nature exists e.g. charismatic species – Option Value: Value from retaining options that may arise in the future e.g. medical discoveries – Bequest Value: Value from conserving nature for future generations Non-Use Values in TEV

15 Valuation methods Non-market valuation Market valuation Benefit Transfer Market price Avoided damages Stated Preference Revealed Preference Hedonic pricing Travel cost Contingent Valuation Choice modeling Surrogate market Hypothetical market Direct & indirect market

16 Market valuation Valuation using conventional good/service prices In a competitive market, the market price depicts the marginal benefit of a good/service Net benefit can be calculated by combining price with quantity and cost estimates Market price method – Actual prices of goods/services Avoided damages method – Costs incurred in the absence of the service – Market prices of equivalent non-ecosystem services

17 Non-market valuation Revealed-preference methods: use observed behavior to identify value in a surrogate market – Hedonic pricing method (Land market) Influence of environmental/ecosystem attributes on property value – Travel cost method (Tourism market) Costs of recreational visits as proxy of economic use values associated with ecosystems or sites

18 Non-market valuation Stated-preference methods: use reported choices to estimate value in a hypothetical market – Contingent valuation Ask respondents to express their willingness to pay (WTP) or willingness to accept (WTA) compensation for changes in ecosystem services – Choice modeling Ask respondents to rank/rate/choose alternative choice sets which have different combination of price attribute and ecosystem attributes

19 Benefits / Value Transfer With resource or time constraints, novel analysis may be impossible Benefits transfer uses existing studies to inform valuation efforts Spatial variability demands careful application of this approach – biophysical attributes (climate, quality, size…) – socio-economic attributes (management, disturbance…)

20 Valuation methods in InVEST Non-market valuation Market valuation Benefit Transfer Market price Avoided damages Stated Preference Revealed Preference Hedonic pricing Travel cost Contingent Valuation Choice modeling Surrogate market Hypothetical market Direct & indirect market Current InVESTSupplemental analysis with InVEST output

21 Valuation methods in InVEST MethodES classificationInVEST model Market Price Avoided Damages Travel Cost Provisioning Regulating Cultural/Aesthetic Fish Aquaculture Managed Timber Production Wave Energy Reservoir Hydropower Production Agricultural Production Non-timber Forest Product Production Carbon Sequestration Crop Pollination Water for Irrigation Water Purification: Nutrient Retention Sediment Retention Carbon Sequestration Storm Peak Mitigation Recreation/Aesthetic

22 Net Present Value (NPV) The Net Present Value (NPV) of an ecosystem service is the present value of the expected net benefit flows over time. Number of years present landscape conditions are expected to persist, or total years the service is valued for. Discount rate (0%~100%): Weight of present benefits versus future benefits Larger r  more weight on present

23 Limitations Limitations of economic valuation – Revealing preferences (partial, indirect, subjective) – Aggregating individual preferences (conflicts, relative weight) – Addressing uncertainty (in science, in methods) – Setting the discount rate (present vs. future) – Capturing full value (TEV not often achieved) InVEST provides rapid, conservative valuation – Better used for comparison among scenarios Validated value estimates are more reliable for absolute magnitude Daily et al. 2000, The Nature of Value and the Value of Nature.

24 Discussion Questions 1.What are you hoping to achieve / have you achieved using valuation? 2.When do you think monetary values help? 3.What is your biggest concern about valuation?


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