Project update Each step builds on the previous step Each step builds on the previous step Your problem statement uses your literature review to tell a story. The story will conclude with your goals. Objectives are the steps you take to achieve your goals. Methods explain how you will achieve your objectives. Your problem statement uses your literature review to tell a story. The story will conclude with your goals. Objectives are the steps you take to achieve your goals. Methods explain how you will achieve your objectives.

Environmental Valuation

The Question Can monetary valuation of the environment help us balance marginal costs and marginal benefits of economic decisions? Can monetary valuation of the environment help us balance marginal costs and marginal benefits of economic decisions? Can it help us solve the macroallocation problem? Can it help us solve the macroallocation problem?

Functions of prices Measure value Measure value Maximize monetary value Maximize monetary value Allocation function Allocation function Rationing function Rationing function Does it work? Non-rival goods Does it work? Non-rival goods Is it what we want? Is it what we want? Measure scarcity Measure scarcity Accounting Accounting

Conventional Valuation Methods Direct market value Direct market value Indirect market value Indirect market value Avoided cost Avoided cost Replacement cost Replacement cost Factor income Factor income Travel cost Travel cost Hedonic pricing Hedonic pricing Contingent valuation Contingent valuation WTP WTP WTA WTA Loss aversion Loss aversion

Current Applications Cost Benefit Analysis Cost Benefit Analysis Internalizing externalities (e.g. green taxes, assurance bonds, etc.) Internalizing externalities (e.g. green taxes, assurance bonds, etc.) Policy decisions (e.g. climate change, biodiversity loss) Policy decisions (e.g. climate change, biodiversity loss) Regulatory choices (e.g. leaded gasoline) Regulatory choices (e.g. leaded gasoline) Expenditure decisions Expenditure decisions Damage assessments Damage assessments National accounts National accounts Calling attention to the problem Calling attention to the problem

What is CBA? Can the winners potentially compensate the losers? Can the winners potentially compensate the losers? Potential Pareto Optimality Potential Pareto Optimality

Discounting How do we deal with future values (costs and benefits)? How do we deal with future values (costs and benefits)? Opportunity cost Opportunity cost Pure time preference Pure time preference Richer future Richer future Uncertainty Uncertainty

Incommensurability Can all things can be measured in same units? Can all things can be measured in same units? How much for your daughter? How much for your daughter?

Uncertainty, Ignorance, Irreversibility and Complexity Emergent phenomena, surprises, thresholds Emergent phenomena, surprises, thresholds Amazon, rainfall and the Cerrado Amazon, rainfall and the Cerrado Mata Atlantica, habitat loss, extinction and time lags Mata Atlantica, habitat loss, extinction and time lags Monetary values can be no more accurate than ecological knowledge Monetary values can be no more accurate than ecological knowledge

Future Generations Cannot possibly bid in today’s markets Cannot possibly bid in today’s markets Monetary valuation assumes they have no rights. Monetary valuation assumes they have no rights.

The Case of Critical Natural Capital When and How do we Apply Valuation?

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 Ecological thresholds Ecological thresholds Interdependent elements of complex system Interdependent elements of complex system

The Demand Curve for Natural Capital

Region 1 E.g. forests in Vermont E.g. forests in Vermont Price can determine conservation needs Price can determine conservation needs Estimate monetary value, provide information to decision makers, feed into market price (e.g. green taxes) Estimate monetary value, provide information to decision makers, feed into market price (e.g. green taxes) Only appropriate when rate of change in value is slow, i.e. region I Only appropriate when rate of change in value is slow, i.e. region I Far from threshold, errors not that important Far from threshold, errors not that important

Region II Estimated price very sensitive to errors Estimated price very sensitive to errors Let knowledge of thresholds and other ecological criteria determine conservation needs Let knowledge of thresholds and other ecological criteria determine conservation needs Conservation needs then determine price Conservation needs then determine price Prices adjust to conservation constraints much more rapidly than ecosystems adjust to prices. Prices adjust to conservation constraints much more rapidly than ecosystems adjust to prices. E.g. laws (unenforced) limiting deforestation in Amazon E.g. laws (unenforced) limiting deforestation in Amazon International incentives essential International incentives essential

Region III Restoration is essential Restoration is essential E.g. Atlantic Forest E.g. Atlantic Forest Time lags give us limited time to act Time lags give us limited time to act Economists should focus on supply curve, not demand curve Economists should focus on supply curve, not demand curve What is most cost effective way to restore critical natural capital? What is most cost effective way to restore critical natural capital?

Region III Finance more important than valuation Finance more important than valuation Must combine polluter pays principle, beneficiary pays principle Must combine polluter pays principle, beneficiary pays principle Trace flows of damages and benefits Trace flows of damages and benefits Wealthy countries must finance provision of global public good benefits, pay for costs of global climate change Wealthy countries must finance provision of global public good benefits, pay for costs of global climate change ICMS ecologico good model ICMS ecologico good model

Integrative, applied methods What is the value of salmon in the Puget Sound What is the value of salmon in the Puget Sound ARIES TPADMw ARIES TPADMw

Conclusions Worst approach is to assign no value to environment Worst approach is to assign no value to environment Environmental valuation can help determine when conservation is needed Environmental valuation can help determine when conservation is needed Calls attention to problem Calls attention to problem Can help in allocation when ecosystems are healthy, resilient Can help in allocation when ecosystems are healthy, resilient Economic values never better than ecological knowledge—close collaboration essential Economic values never better than ecological knowledge—close collaboration essential

Conclusions For stressed systems, conservation needs must determine environmental values For stressed systems, conservation needs must determine environmental values Economics take back seat to ecology Economics take back seat to ecology Many, many systems are stressed Many, many systems are stressed Global effort required to protect globally interconnected ecosystems Global effort required to protect globally interconnected ecosystems Beneficiary countries should pay provider countries Beneficiary countries should pay provider countries Ecologists/life scientists must educate economists on thresholds, criticality of natural capital Ecologists/life scientists must educate economists on thresholds, criticality of natural capital