In this subsection:

Reasons for this Subsection
Assessing Environmental Investment Risk
Illustration: Assessing Environmental Risks and Benefits 
Key Issues
Determinants of Economic Value
Three Accepted Approaches for Estimating Economic Value
Monetary Measures of Ecosystem Value
Strengths and Weaknesses Of Absolute (Dollar-Based) Ecosystem Valuation
Strengths and Weaknesses of Non-monetary Indices
Illustrations: Risk in Using Dollar-based Wetland Valuation

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Part I

Introduction to Relative Ecosystem Valuation

Steps in Developing Relative Value Indicators

Three Illustrations of Relative Ecosystem Value

Part II

Types of Indicators

Definitions
Food For Thought

Reasons for this Subsection

The ecosystem valuation Website is a work in progress.  Earlier sections dealing with dollar-based valuation methods are in good shape and meet the goal of providing noneconomists with a clear understanding of the pros and cons of  each methodological alternative. The same cannot be said for this section which deals with relative (non-monetary) indicators of ecosystem values. The problem here is that unlike dollar-based methods that are based on well-documented conceptual research and  field testing, the methods for developing relative value indicators are still under development and have not been widely tested. Any proposal to use a measure of  value other than dollars  to guide environmental investment decisions will attract careful scrutiny and deserves careful consideration. Until work in this area is further along it will not be possible for valuation researchers to provide field staff with anything more than the general guidance offered  earlier.

This Food for Thought page serves as a dumping ground for information that valuation researchers and indicator developers may find useful.  The contents may be too abstract or technical for those interested in  tools that are usable in the field now; however it should be useful for those involved in research to develop and justify the use of such tools. 

Until research in this area results in a coherent set of principles and guidelines  we will continue to add to this section. We encourage anyone involved in valuation research or indicator development to browse this section every so often, and to  to use feedback to provide contributions or leads about contributions.  

Assessing Environmental Investment Risk

Risk

Risk may be described as the volatility of potential outcomes

Managing Risk 

How do we manage risk? One approach considers the following:
 
Determine what conditions need to remain the same and what conditions need to change to achieve desired outcomes.
Monitor those risk factors that will determine whether the necessary conditions will exist.
Act to control those risk factors that are practical to control.
React in a timely and responsible way to changes in those risk factors that cannot be controlled. 

Measuring Risk
 
Exposure How many and what kinds of uncontrollable (exogenous) risk factors could affect the potential outcome? 
Timeliness Are the trends related to important risk factors becoming more or less favorable?Ê
Volatility What is the range of likely outcomes if all the uncontrollable risk factors line up against success? 
Safety Are there ways to minimize or mitigate the influence of uncontrollable risk factors?
Persistence If they appear, for how long will uncontrollable risk factors influence the success of the project? 

Predictability

What data exist to suggest the probability of undesired Outcomes?

Illustration: Assessing Environmental Risks and Benefits 

Working Hypothesis

In assessing the potential benefits from environmental investments, it is impossible to distinguish between well-reasoned risk assessment and well-reasoned benefit assessment. Therefore, we consider the following assumptions in an evaluation of risk and benefit.

General Operating Assumptions
 
Assessing Benefits of environmental investments requires forecasting outcomes with and without the investment
Assessing Risks associated with environmental investments involves measuring the volatility of potential outcomes 

If the endpoint involves people it is impossible to distinguish between good risk assessment and good benefit assessment. 

Specific Operating Assumptions 
 
The value of a natural asset depends on the stream of services it is expected to provide over time and the preferences of people for those services.
The expected stream of services depends on site and landscape conditions now and in the future.
Restoration projects change site features such as soil characteristics, vegetative cover, hydrology, but do not address all of the necessary conditions for value.
Functions and services resulting from restoration projects depend on the landscape context of the site which also helps determine the relative value of these functions and services. 

The expected values of service flows resulting from restoration projects depends on the likelihood that necessary site and landscape conditions will exist and persist.

Characteristics
 
Topographical
relevant hydrological/ geological features, such as upslope/ downslope gradients, proximity to water bodies, floodplains.
Habitat
connections to fish, wildlife, fur-bearer habitats(e.g., flyways, wildlife corridors, other wetland areas).
Man-made
proximity to residential, commercial, industrial land uses, including proximity to roads, parking lots, right of ways, etc.
Demographic 
size/ age/ mobility/ ethnicity/ geographic distribution of human populations that benefits from specific wetland services.
Socioeconomic 
income, assets, and other characteristics of the population that benefits from specific wetland services.

Services
 
Scarcity
the overall abundance of wetland services in the region and the availability of similar services in nearby regions. All other things equal, fewer perfect and near-perfect substitutes mean higher willingness to pay per unit service.
Scale
the size of the population that has access to the service. All other things equal, the greater the number of people with access to wetland services the greater the economic value of the services.
Access Cost
time and money required to take advantage of the wetland services. All other things equal, the lower the cost of access to a wetland service, the greater the value of the services to those who have access.

Preferences
 
Revealed
participation rates, purchasing patterns, subscriptions, donations, and other decisions that reveal preferences for wetland services.
Stated
relative values assigned to wetland services by individuals, community leaders, elected officials, or citizen valuation juries.
Imputed
individual and community preferences assigned to wetland services and imputed to wetland functions and features as a result of choice modeling, conjoint analysis, and other forms of multi-attribute analysis.

Key Issues

Do the ranking criteria used in environmental incentive programs take adequate account of factors that can be expected to influence environmental and economic benefits from changes in conservation practices at various locations?

If not, are there practical indicators to introduce that may be expected to improve environmental and economic benefits, or to reduce costs, or both?

What are the practical limitations of developing and using such indicators

Can indicators related to equity and parity be used to characterize tradeoffs ?

Should they be developed? 

Determinants of Economic Value

There are many useful measures of value. However, in conventional economics the economic value that an individual places on a particular ecosystem service is presumed to be reflected by that individuals willingness to pay for it. Although often immeasurable this is generally understood to depend upon: a) preferences; b) income; c) the cost in time and money of gaining access to the service; d) the availability of perfect substitute; and e) the availability of near-perfect or, at least acceptable, substitutes.

For example, an individual's willingness to pay for improved recreational fishing at a particular lake depends on how much the individual enjoys fishing; how much discretionary time and money the individual has to spend; how much it costs to get to and participate in fishing at that lake; the quality, cost, and accessibility of fishing at other nearby lakes; and the availability of other similar types of fishing opportunities in rivers, streams and other forms of outdoor and indoor recreational opportunities. 
 

Three Accepted Approaches for Estimating Economic Value 
revealed willingness to pay

market prices

when people purchase something (e.g., a home near a wetland) or spend time and money to get somewhere (e.g., a fishing spot or bird watching dependent on a nearby wetland) they reveal that they are willing to pay at least what they actually spend; they may be willing to pay more.
expressed willingness to pay

survey results

Many wetland services are not traded in markets (e.g., a scenic view or a day of bird watching) so people may never reveal what they are willing to pay for them. Simply asking them what they would be willing to pay can sometimes yields useful results. Surveys of willingness to pay are expensive and controversial and usually yield results that are reliable only when questions are asked about specific wetland services provided in specific contexts. 
derived willingness to pay 

circumstantial evidence

This method involves tracing and measuring the functions provided by an wetland (e.g., retaining floodwater, reducing wave energy, maintaining water quality) and estimating what people would be willing to pay to avoid the adverse effects of losing them. The dollar value of flood and siltation damage avoided because of a wetland is an example of derived willingness to pay for wetland services.

Monetary Measures of Ecosystem Value

Economic values are not the only useful measure of value for ecosystems or anything else. However, in conventional economics, it is generally accepted that a measure of value should be based on what people want and that people, not the government, scientists, or preachers, should be the judge of what they want. Based on this individualistic notion of value, the amount of one thing a person is willing to give up to get more of something else is considered a fair measure of the relative value of the two things in the eyes of that person.

Dollars are an enormously useful and universally accepted basis for expressing and comparing economic values because the number of dollars that people are willing to pay for something reflects how much of all other for-sale goods and services they are willing to give up to get it. In the case of ecosystems it is important that measuring the economic value of something based on this notion does not require that it be bought and sold in markets. It only requires that someone estimate how much purchasing power (dollars) people would be willing to give up to get it (or would need to be paid to give it up) if they were forced to make a choice. 

The three general approaches to estimating the economic value of ecosystem services are outlined in the above Table. People can reveal the dollar value they place on some services by their purchasing decisions; people can express the dollar value they place on some services through "willingness to pay" surveys; and people's "willingness to pay" for some services can be imputed based on the costs they would incur if the services were not provided.

Strengths and Weaknesses Of Absolute (Dollar-Based) Ecosystem Valuation
 
Strengths
Universally Accepted Measure of Economic Benefits
Easy to Interpret and to use for purposes of comparison
Suitable for use in conventional Cost-Benefit Analysis
Only measure of economic benefits acceptable to some people
Weaknesses
Non-market $$ Valuation Methods are not fully developed
Non-market $$ Valuation Methods are expensive to apply
Results of Non-market $$ Methods are controversial
Results are almost always site-specific
Results of good studies almost always apply to individual services
Results not generally accepted in courtrooms and hearing rooms
Difficult to address linkages between benefits and decisions
Difficult to use to compare environmental assets being traded
Difficult to use to prioritize environmental assets
Strengths and Weaknesses of Non-monetary Indices
Strengths
Can focus on necessary conditions to provide services
Can be based on conventional tool ö the production function
Can reflect factors that determine aggregate willingness to pay
Can reflect risks of service flow disruptions 
Can be site-based and take account of landscape context
Can be used as benefit-transfer method if $$ estimates exist
Can be used to compare environmental assets for trading
Can be used for prioritizing environmental investments
Similar to indicators that decision-makers use everywhere else
Practical because of GIS and Web
Can reflect relative preferences for mix of services
Weaknesses
Cannot be used in conventional benefit-cost analysis
Not very useful for justifying increases in levels of $ spending
Generally unpopular with economists, scientists, & policymakers
Requires some decisions that will appear to be arbitrary
Requires acceptance as better than $$ and better than nothing
Requires upfront investments in data collection/software

Illustrations: Risk in Using Dollar-based Wetland Valuation

Case 1: The Willingness to Pay Survey

At a coastal zone hearing, a wetland advocate bases his testimony on survey results published in the journal Wetlands (July, 1995) showing that people are willing to pay $100 per household to protect wetlands within 25 miles of their homes. An opposing expert points out that the survey did not specify the type, size, or condition of the wetland or how many other wetlands were in the survey area. She presents evidence that the survey results in a nearly infinite dollar value being placed on tiny degraded wetlands in an urban settings ö where there are many households ö and a very low value being assigned to large pristine wetlands in rural areas. Admitting that the cost of doing the survey correctly would be prohibitive the wetland advocate withdraws his testimony and the wetland in question is permitted for development. Bad willingness to pay surveys do not hold up; good ones are expensive and still may not hold up. 

Case # 2: The Derived Fishery Value Approach

Studies show that coastal wetlands in Massachusetts support over 75% of commercially valuable fish species. However, Massachusetts fisheries have been so mismanaged and overfished over the past twenty years that their economic value is near zero. A contracted study to estimate the derived value of wetlands to the state's fisheries yields estimates that are less than one dollar per wetland acre. Using this method, the mismanagement of fisheries results in very little justification for protecting the wetlands on which fishery recovery may depend.

Case # 3: The Hedonic Housing Value Approach

At a public hearing to consider a wetland development, a wetland advocate cites a wetland valuation study showing that the average price of a home adjacent to a wetland in the Chesapeake Bay area is $10,000 higher than an identical home that is not adjacent to a wetland. Later in the day experts representing the prospective wetland developer accept this as a valid basis for comparing economic value. They then provide results from a similar study showing that the average price of a home adjacent to a wetland area that has been filled and bulkheaded with a dock on an adjacent water body is $50,000 to $80,000 higher than a house not adjacent to a wetland. It is dangerous to validate a statistical method unless you know how it can be used against you. 

Case # 4: Benefit Transfer Approach

An environmental group presents testimony in Oregon based on a widely disputed study in Louisiana that generated a wetland economic value of $28,000 per acre. After disputing the validity of the estimating method and of using estimates from Louisiana in Oregon, the opposing side agrees to accept the number as fact, and points out that the county already requires $40,000 per acre in compensation for wetland impacts as part of its in lieu mitigation fee program. Later in the year a group of wetland developers who are also paying $40,000 per acre as wetland impact fees sue the state to reduce the fee and, using evidence presented by the environmental group, get the fee lowered to $28,000. 

Case # 5: The Innovative Valuation Approach

A county ecologist cites the results of an innovative wetland valuation study that assigned a dollar value of $20,000 per acre to wetlands based on their embodied energy. However, several university scientists contracted by the developer's expert provide evidence that the embodied energy in an acre of wetland, an acre of poison ivy, or an acre of strawberries is about the same; they go on to note that it is not much different than the embodied energy in a swarm of malaria-infested mosquitoes or the last humpback whale. The county economist then testifies that the embodied energy in wetlands or anything else has absolutely no relationship to how much people are willing to pay to protect them or for the services or products they provide. The county ecologist is taken off the list of county officials asked to provide comments on wetland development proposals. 

Case # 6: The Replacement Cost Approach

At the request of state wetland managers, local engineers estimate that the cost of trying to restore a 1,000 acre bottom land non-tidal wetland area that is being threatened with development to pre-colonial conditions is over $300,000 per acre. This figure is used at a public hearing as an indicator of wetland value. Under questioning, the wetland manager agrees that no one in his right mind would spend $300 million to try to restore this 1,000-acre site to pre-colonial conditions. When asked if it was fair to offer the $300,000 per acre figure as an estimate of the economic value of this wetland area the wetland manager admits he is not sure it is. When asked if the $3,000 in fees paid to the engineering firm to estimate restoration cost was a good use of tax dollars he admits that he is sure it wasn't.

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