1. The Political Economy of Ecosystem Services: Sustainability, Justice and Efficiency Joshua Farley Community Development and Applied Economics Gund Institute for Ecological Economics University of Vermont

2. What are Ecosystem Services? Most conventional definitions too simplistic, not very useful, e.g. “ecological functions of value to humans” Most conventional definitions too simplistic, not very useful, e.g. “ecological functions of value to humans” Important to distinguish between goods and services, structure and function Important to distinguish between goods and services, structure and function

3. Ecosystem Goods Raw materials required for all economic production: stock-flow resource Raw materials required for all economic production: stock-flow resource Physically transformed into economic products Physically transformed into economic products Failure to ration leads to overuse Failure to ration leads to overuse Value is independent of time; we decide when and how much to harvest Value is independent of time; we decide when and how much to harvest Generally market goods Generally market goods Value determined by benefit to single individual Value determined by benefit to single individual

4. Ecosystem Services Generated by particular configuration of ecosystem structure: fund-service resource Generated by particular configuration of ecosystem structure: fund-service resource Ecosystem structure not physically transformed into services it provides Ecosystem structure not physically transformed into services it provides Value is flow over time Value is flow over time Provisioning service = reproductive capacity Provisioning service = reproductive capacity Often non-excludable Often non-excludable Non-market, cannot be rationed Non-market, cannot be rationed Often non-rival Often non-rival Value determined by sum of benefits to all individuals Value determined by sum of benefits to all individuals Rationing access reduces value Rationing access reduces value

5. Examples of Ecosystem Service Regulating services Regulating services Regulation of climate, disturbance, water, atmospheric gas, etc. Regulation of climate, disturbance, water, atmospheric gas, etc. Provisioning services Provisioning services Reproductive capacity of living organisms Reproductive capacity of living organisms Cultural/information services Cultural/information services Recreation, spiritual values, genetic information, etc. Recreation, spiritual values, genetic information, etc. Supporting services Supporting services Those that sustain the ecosystem as a whole: pollination, habitat, etc. Those that sustain the ecosystem as a whole: pollination, habitat, etc.

6. Ecosystem Services and Commodification Many economists are actively seeking to integrate ecosystem services into the market framework Many economists are actively seeking to integrate ecosystem services into the market framework Critics of this approach call it the commodification of nature Critics of this approach call it the commodification of nature This presentation breaks the debate down into three societal goals concerning ecosystem services: Sustainability, Justice and Efficiency This presentation breaks the debate down into three societal goals concerning ecosystem services: Sustainability, Justice and Efficiency

7. Sustainability

8. Ecological Economic World View Economy is sustained and contained by global ecosystem Economy is sustained and contained by global ecosystem Relative scarcity has changed dramatically Relative scarcity has changed dramatically Economy must adapt Economy must adapt

9. Laws of Physics Can’t make something from nothing or vice versa Can’t make something from nothing or vice versa Can’t do work without energy Can’t do work without energy Disorder increases Disorder increases

10. Laws of ecology Conversion of ecosystem structure into economic products and waste degrades and destroys ecosystem services Conversion of ecosystem structure into economic products and waste degrades and destroys ecosystem services Time lags common Time lags common Both economic products and ecosystem services essential to civilization Both economic products and ecosystem services essential to civilization Unavoidable tradeoffs Unavoidable tradeoffs

11. The Laws of Economics Rising ecological costs to growth Rising ecological costs to growth Diminishing economic benefits Diminishing economic benefits When the marginal costs of doing something exceed the marginal benefits, stop When the marginal costs of doing something exceed the marginal benefits, stop Uneconomic growth Uneconomic growth Markets provide no “when to stop” signal for economic growth Markets provide no “when to stop” signal for economic growth

12. Essential and Non-substitutable Resources Food, water, energy, ecosystem services Food, water, energy, ecosystem services Critical natural capital Critical natural capital Components of natural capital that are essential to human survival and for which there are no adequate substitutes Components of natural capital that are essential to human survival and for which there are no adequate substitutes Critical thresholds Critical thresholds Physiological Physiological Ecological Ecological Inelastic demand Inelastic demand Large changes in marginal value with small changes in quantity Large changes in marginal value with small changes in quantity

13. Does Critical Natural Capital Exist? Schelling (Nobel Memorial Prize in 2005): “Agriculture and Forestry are less than 3% of total output, and little else is much affected. Even if agricultural productivity declined by a third over the next half century, the per capita GNP we might have achieved by 2050 we would still achieve in 2051.” Schelling (Nobel Memorial Prize in 2005): “Agriculture and Forestry are less than 3% of total output, and little else is much affected. Even if agricultural productivity declined by a third over the next half century, the per capita GNP we might have achieved by 2050 we would still achieve in 2051.” Production functions and substitutability Production functions and substitutability

14. Or is it all CNC? “If the biota, in the course of aeons, has built something we like but do not understand, then who but a fool would discard seemingly useless parts? To keep every cog and wheel is the first precaution of intelligent tinkering.” Aldo Leopold “If the biota, in the course of aeons, has built something we like but do not understand, then who but a fool would discard seemingly useless parts? To keep every cog and wheel is the first precaution of intelligent tinkering.” Aldo Leopold

15. Demand curve for essential resources: Food Value: low and stable Trade-offs: relatively unimportant benefits Value: shift from marginal to total value (e.g. diamond-water paradox) Trade-offs: Life sustaining benefits Value: Increasing rapidly with decreasing quantity. Trade-offs: Resilience, increasingly important benefits physiological threshold: e.g. starvation food security, household security

16. The Biophysical Demand Curve for Critical Ecosystem Services

17. Sustainability and Markets Markets assign no property rights to future generations; todays prices do not reflect future demand Markets assign no property rights to future generations; todays prices do not reflect future demand Markets systematically discount the future, hence the value of sustainability Markets systematically discount the future, hence the value of sustainability Markets are designed to manage preferences, e.g. oranges vs. apples. No ethical implications Markets are designed to manage preferences, e.g. oranges vs. apples. No ethical implications Sustainability is a higher order end than preferences Sustainability is a higher order end than preferences

18. Justice

19. Who should make decisions concerning ecosystem services? Shared inheritance from nature Shared inheritance from nature Ethical obligations to leave for future generations Ethical obligations to leave for future generations Market decisions and market valuation based on preferences weighted by purchasing power Market decisions and market valuation based on preferences weighted by purchasing power One dollar, one vote One dollar, one vote Who values ES the most? Who values ES the most? Conventional view is that they are luxury goods; e.g. Lawrence Summers quote Conventional view is that they are luxury goods; e.g. Lawrence Summers quote

20. The Biophysical Demand Curve for local CNC: Rich vs. Poor

21. Market demand curves in an unequal world ~50% of income ~1% of income Price = opportunity costs

22. Real World Outcomes from Market Allocation Food in 2007 Food in 2007 Eflornithine Eflornithine Water Water

23. Whose Values Matter? Biophysical demand greater for poor, market demand greater for rich Biophysical demand greater for poor, market demand greater for rich One person, one vote or one dollar, one vote? One person, one vote or one dollar, one vote? Or should we weight votes by need? Or should we weight votes by need?

24. Definitions of Justice Procedural Justice Procedural Justice Just Deserts Just Deserts Contextual justice/just outcomes Contextual justice/just outcomes Is market allocation just for any of these? Is market allocation just for any of these?

25. Efficiency

26. What is Efficiency? Pareto Efficiency? Pareto Efficiency? From utility to Pareto efficiency From utility to Pareto efficiency Satisfactory well-being for as many people as possible while minimizing risk to life sustaining ecosystem services? Satisfactory well-being for as many people as possible while minimizing risk to life sustaining ecosystem services?

27. Requirements for Market Efficiency Excludability Excludability One group or person can own something and keep others from using it. One group or person can own something and keep others from using it. True for most ecosystem goods (stock-flows) but not true for ecosystem services True for most ecosystem goods (stock-flows) but not true for ecosystem services Policy variable Policy variable Rivalry Rivalry One person’s use leaves less for others One person’s use leaves less for others True for all stock-flows, but not for all fund- services True for all stock-flows, but not for all fund- services Not a policy variable—loaves and fish Not a policy variable—loaves and fish

28. The ‘Market’ Demand Curve for Global CNC

29. Market Allocation of Essential Resources on an Unequal Planet Is it Pareto efficient? Is it Pareto efficient? Would it be possible to re-allocate food from obese people to malnourished people without making anyone worse off? Would it be possible to re-allocate food from obese people to malnourished people without making anyone worse off? Do we need to make subjective value judgments to answer this? Do we need to make subjective value judgments to answer this? Does it maximize utility? Does it maximize utility? Do we want to apply this logic to non- marketed ES? Do we want to apply this logic to non- marketed ES?

30. Solutions from Ecological Economics Internalize market into global ecological and social systems Internalize market into global ecological and social systems First determine sustainability, planetary boundaries and cap throughput First determine sustainability, planetary boundaries and cap throughput Second determine just distribution Second determine just distribution Third allocate resources efficiently: sufficient well-being from sustainable throughput Third allocate resources efficiently: sufficient well-being from sustainable throughput

32. Valuation and Policy for Sustainable, Just and Efficient Allocation Safe scarcity: value low and stable Policy: Market valuation/allocation potentially suitable Not many resources in this category Unsafe scarcity: critical for those with poor access. Policies: 1) Halt degradation, loss 2) Ensure basic needs are met 3) Markets can allocate surplus (quantity determines price) Critical: Restoration essential. Economics should focus on replacement cost (supply curve) from non-essential to important needs

33. Conclusions How we allocate depends on our goals and the nature of the scarce resources How we allocate depends on our goals and the nature of the scarce resources The concept of ecosystem services helps us understand our goals and resource characteristics The concept of ecosystem services helps us understand our goals and resource characteristics Leads to conclustion that it is safer to adapt economic institutions to ecosystem services than to force ES into market Leads to conclustion that it is safer to adapt economic institutions to ecosystem services than to force ES into market