1. Danièle Perrot-Maître
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, October 2005

2. 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

3. Ecosystems products and services
Food
Fuel wood
Non-timber forest products
Fisheries products
Marine products
Wetlands products
Medicinal and biomedical products
Forage and agricultural products
Water
Reeds
Building material
Functions/Services
Hydrological services
Purification of water
Capture, storage and release of surface and groundwater
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)

4. USE VALUES NON-USE VALUES
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 Ecological services, such as flood control, 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.
USE VALUES
NON-USE VALUES
Existence values
Intrinsic value of resources and landscapes, irrespective of its use such as cultural, aesthetic, bequest significance, etc.

5. 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?

6. Stated Preference Methods
Cost- Based Methods
Revealed Preference
Methods
Stated Preference Methods
Contingent Valuation
Conjoint Analysis
Choice Experiments
Replacement Costs
Cost of providing substitute services
Damage cost avoided
Effect on Production
Productivity Approach
Surrogate Market Approaches
Travel
Costs
Hedonic Pricing
Market Price Method
Market Prices

7. Productivity & cost-based approaches
Direct values
Goods and products
Indirect values
Ecosystem services
Option values
Existence values
Nature tourism
Market Prices
Effect on Production
Replacement Costs
Cost of Providing Substitutes
Cost of Avoided Damage
Productivity & cost-based approaches
Travel Costs
Contingent Valuation
Surrogate market & stated preference approaches

8. Revealed Preference Methods Stated Preference Methods
Cost- Based Methods
Revealed Preference Methods
Stated Preference Methods
Contingent Valuation
Conjoint Analysis
Choice Experiments
Replacement Costs
Cost pf providing substitute Services
Damage Cost Avoided
Effect on Production
Production Function Approaches
Surrogate Market Approaches
Travel
Costs
Hedonic Pricing
Market Prices

9. People’s actual willingness to pay
MARKET PRICES
E.g. Nam Et & Phou Loei NBCA, Lao PDR:
Value of NTFP use for Viengthong District villages
Cash income $634,000
Plant foods $45,000
Wild meats $476,000
Fuel and housing $480,000
Crop consumption $241,000
TOTAL VALUE $1,876,000
What it costs to buy or sell a good or product
People’s actual willingness to pay

10. 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)

11. Market value as an input
PRODUCTIVITY METHOD
Flood attenuation benefits from forests, Madagascar
Value of flood damage to paddy production
NPV for forest watershed protection
benefits: $126,700.
Resulted in the establishment of
Mantadia NP
The economic contribution of ecosystems to other production and consumption activities
Market value as an input

12. 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.

13. People’s implied willingness to pay
TRAVEL COSTS
How much people spend to use or benefit from using ecosystems for recreational purposes
People’s implied willingness to pay
USA, Value impacts of improved environmental quality on freshwater recreation in the US
Combined benefit of all freshwater-based
recreation: $37 billion/year

14. 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)

15. REPLACEMENT COSTS
E.g. Ream National Park, Cambodia:
Value of mangrove ecological services (flood barriers, upstream erosion control)
Storm protection $60,000
Silt trapping $220,000
TOTAL VALUE $280,000
The costs of replacing an environmental good or service A minimum estimate of money saved

16. COSTS OF MITIGATING ECOSYSTEM DEGRADATION
The costs of mitigating or averting the effects of the loss of an environmental good or service
A minimum estimate of money saved
E.g. Thua Thien Hue, Vietnam:
Value of watershed catchment protection for urban and rural water supplies (Infrastructure to mitigate erosion, seasonal low water supplies and flooding)
Investment costs $27 million
Recurrent costs $1.8 million
ANNUAL COST $2.88 million

17. DAMAGE COSTS AVOIDED
E.g. Value of Phnom Bokor NP for watershed protection and hydropower generation
Failure to invest in watershed management
as a component of dam maintenance could incur
NPC of over $2million in terms of power
revenues foregone
The costs avoided from the destruction of ecosystem A minimum estimate of money saved

18. 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

19. 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

20. People’s stated willingness to pay
CONTINGENT VALUATION
The amount people would pay/accept under the theoretical condition that biodiversity could be bought and sold
People’s stated willingness to pay
E.g. Doi Inthanon and Suthep Pui National Parks, Thailand:
Willingness to pay for park entry fees
Doi Inthanon 40 Baht per person
Suthep Pui 20 Baht per person
TOTAL VALUE $1.2 million/year

21. 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

22. 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

23. LESS COMMON METHODS Hedonic Pricing Conjoint Analysis
Difference in (property or wage) prices that can be ascribed to the existence or level of nearby environmental goods and services.
Hedonic Pricing
Conjoint Analysis
Choice Experiments
Obtains information on preferences between various alternatives of environmental goods and services, at different price or cost.
Present a series of alternative resource or use options, each of which are defined by various attributes including price.

24. Application of economic valuation to PES design

25. 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

26. Applying ecosystem valuation to payment for ecosystem service: simple in theory
Conservation without payment
Conventional resource use:
no conservation
Minimum payment willing to receive to change damaging behaviour to ecosystem
Conservation with payment
for service
Payment
Benefits to producers
Costs to offsite populations
Maximum payment
willing to pay to reduce
environmental damage
Source: Adapted from World Bank 2002

27. In practice, not so simple…

28. In practice not so simple… Complex biophysical linkages (Brand 2003)

29. In practice still not so simple…valuing effects of change in ecosystem conditions on agricultural production

30. 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.

31. 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.

32. Concluding remarks

33. 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.

34. 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.

35. 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.
Value of ecosystems on a large scale, marginal price for an extra unit of water is no longer a reliable guide . Only useful guide as long as resource is not so scarce o
Work published in Nature in attempted to calculate the total value of all ecosystems on earth. Used a range of estimates of the value of the value of individual ecosystems and scaled them up according total area coverd by each ecosystem globally. Value ranged from US16-54 trillion a year with central estimate of US$33 trillion (1997 prices)
Paper had great impact, yet economists consider it flawed conceptually and methodologically
Used benefit transfer approach to generate global estimates. These estimates often unreliable due to wide variation in ecosystem valuesacross diferent sites (especially if dvp levels are different).
Study result exceeds sum of total global economic income recorded in 1997 therefore cannot be interpreted as society’s WTP or WTA compensation for loss of these services (without them we would be dead)

36. 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.

37. 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!

38. For further information: IUCN economic valuation products
Toolkit
Working Papers & Policy Briefs
Case Studies

39. For further information
Toolkit downloadable from:
New revamped website:

40. Thank you!