Environmental Valuation and its Environmental Valuation and its ApplicationsApplications

Joshua FarleyJoshua FarleyCommunity Development and Applied Community Development and Applied

EconomicsEconomicsGund Institute for Ecological EconomicsGund Institute for Ecological Economics

University of VermontUniversity of Vermont

TThehe Problem Problem Finite planet subject to laws of Finite planet subject to laws of

thermodynamics…thermodynamics… Can’t make something from nothingCan’t make something from nothing Energy, required for all productionEnergy, required for all production Raw materials, required for all economic Raw materials, required for all economic

production, essential to human survivalproduction, essential to human survival And laws of ecology…And laws of ecology…

Raw materials are structural building blocks Raw materials are structural building blocks of ecosystemsof ecosystems

Loss of structure + pollution = loss of life Loss of structure + pollution = loss of life support functions and other services, support functions and other services, essential for survival of all speciesessential for survival of all species

TThehe Problem Problem Result is serious biophysical threats Result is serious biophysical threats

to human welfare and survivalto human welfare and survival Climate change and other forms of Climate change and other forms of

pollutionpollution Natural resource depletionNatural resource depletion Loss of biodiversity and ecosystem Loss of biodiversity and ecosystem

servicesservices Laws of economicsLaws of economics

When the marginal costs of an activity When the marginal costs of an activity exceed texceed thehe benefits, halt the activity benefits, halt the activity

Market fails to measure all costs aMarket fails to measure all costs andnd benefitsbenefits

The QuestionThe Question

Can monetary valuation of the Can monetary valuation of the environment help us balance environment help us balance marginal costs and marginal marginal costs and marginal benefits?benefits?

We must truly understand the We must truly understand the function of prices/value to answer function of prices/value to answer this questionthis question

OutlineOutline

Function of prices in a market Function of prices in a market economy and associated problemseconomy and associated problems

Issues with monetary valuation of Issues with monetary valuation of non-markets goods and servicesnon-markets goods and services

When and how should we apply When and how should we apply valuation?valuation?

ConclusionsConclusions

A Critical PerspectiveA Critical Perspective

Function of Prices in a Function of Prices in a Market EconomyMarket Economy

Functions of pricesFunctions of prices

Measure valueMeasure value Maximize monetary valueMaximize monetary value

Allocation functionAllocation function Rationing functionRationing function

Measure scarcityMeasure scarcity Accounting (briefly)Accounting (briefly)

Prices as a Measure of ValuePrices as a Measure of Value

Do Prices Reflect Value?Do Prices Reflect Value? Diamond water paradoxDiamond water paradox Use value vs. exchange valueUse value vs. exchange value Exchange value = marginal value = Exchange value = marginal value =

priceprice

Allocative function of priceAllocative function of price

Apportions factors of production to Apportions factors of production to whatever industry is willing to pay whatever industry is willing to pay the mostthe most Generally the industry that can create Generally the industry that can create

most monetary valuemost monetary value Maximizes monetary value across Maximizes monetary value across

producersproducers

Rationing function of priceRationing function of price Apportions market products to Apportions market products to

whoever is willing to pay the mostwhoever is willing to pay the most Maximizes monetary value across Maximizes monetary value across

consumersconsumers Value is preferences weighted by Value is preferences weighted by

purchasing powerpurchasing power One dollar, one voteOne dollar, one vote

Do Prices Always Maximize Do Prices Always Maximize Monetary Value?Monetary Value?

Non-rival resource: use by one Non-rival resource: use by one person does not leave less for others person does not leave less for others to useto use Rationing is inefficientRationing is inefficient Example of HCFCs and ozone holeExample of HCFCs and ozone hole Optimal price is zeroOptimal price is zero

Many ecosystem services are non-Many ecosystem services are non-rivalrival

Is Monetary Value what we Is Monetary Value what we want to Maximize?want to Maximize?

Eflornithine: Perverse outcomes?Eflornithine: Perverse outcomes? What’s worth more, a tank full of What’s worth more, a tank full of

ethanol for a fat American, or a plate ethanol for a fat American, or a plate full of tortillas for starving Mexicans?full of tortillas for starving Mexicans?

Tyranny of the rich?Tyranny of the rich? One dollar one vote or one person One dollar one vote or one person

one vote?one vote?

Price as measure of scarcityPrice as measure of scarcity

Scarcity Scarcity price increase price increase efficiency efficiency and innovationand innovation

Does this even work for market goods?Does this even work for market goods?

Prices and AccountingPrices and Accounting

Monetary value of Monetary value of food and energy food and energy as supplies as supplies contractcontract

Health care and Health care and GNPGNP

Conventional Economists: Conventional Economists: Missing the point….Missing the point….

Schelling (Nobel Memorial Prize in 2005): Schelling (Nobel Memorial Prize in 2005):

“Agriculture and Forestry are less than “Agriculture and Forestry are less than 3% of total output, and little else is 3% of total output, and little else is much affected. Even if agricultural much affected. Even if agricultural productivity declined by a third over productivity declined by a third over the next half century, the per capita the next half century, the per capita GNP we might have achieved by 2050 GNP we might have achieved by 2050 we would still achieve in 2051.”we would still achieve in 2051.”

Issues with Valuation of Issues with Valuation of Environmental Environmental

ResourcesResources

Uncertainty, Ignorance, Uncertainty, Ignorance, Irreversibility and ComplexityIrreversibility and Complexity

Emergent phenomena, surprises, Emergent phenomena, surprises, thresholdsthresholds

Amazon, rainfall and the CerradoAmazon, rainfall and the Cerrado Mata Atlantica, habitat loss, Mata Atlantica, habitat loss,

extinction and time lagsextinction and time lags Monetary values can be no more Monetary values can be no more

accurate than ecological knowledgeaccurate than ecological knowledge

IncommensurabilityIncommensurability

Not all things can be measured in Not all things can be measured in same unitssame units

How much for your daughter?How much for your daughter?

Future GenerationsFuture Generations

Cannot possibly bid in today’s Cannot possibly bid in today’s marketsmarkets

Monetary valuation assumes they Monetary valuation assumes they have no rights.have no rights.

Essential and Non-substitutable Essential and Non-substitutable BenefitsBenefits

Small changes in quantity lead to Small changes in quantity lead to large changes in valuelarge changes in value

Unless system is static, by the time Unless system is static, by the time valuation studies are published, fed valuation studies are published, fed to decision makers and integrated to decision makers and integrated into policy, they are wronginto policy, they are wrong

The Case of Critical Natural The Case of Critical Natural CapitalCapital

When and How do we When and How do we Apply Valuation?Apply Valuation?

Critical Natural CapitalCritical Natural Capital

Components of natural capital that Components of natural capital that are essential to human survival and are essential to human survival and for which there are no adequate for which there are no adequate substitutessubstitutes

Ecological thresholdsEcological thresholds Interdependent elements of complex Interdependent elements of complex

systemsystem

The Demand Curve for Natural CapitalThe Demand Curve for Natural Capital

Region 1Region 1 E.g. forests in VermontE.g. forests in Vermont Price can determine conservation needsPrice can determine conservation needs Estimate monetary value, provide Estimate monetary value, provide

information to decision makers, feed into information to decision makers, feed into market price (e.g. green taxes)market price (e.g. green taxes)

Only appropriate when rate of change in Only appropriate when rate of change in value is slow, i.e. region Ivalue is slow, i.e. region I

Far from threshold, errors not that Far from threshold, errors not that importantimportant

Add value to cost of conversion (e.g. tax)

Region IIRegion II

Estimated price very sensitive to errorsEstimated price very sensitive to errors Let knowledge of thresholds and other Let knowledge of thresholds and other

ecological criteria determine conservation ecological criteria determine conservation needsneeds

Conservation needs then determine priceConservation needs then determine price Prices adjust to conservation constraints Prices adjust to conservation constraints

much more rapidly than ecosystems adjust much more rapidly than ecosystems adjust to prices.to prices.

E.g. laws (unenforced) limiting E.g. laws (unenforced) limiting deforestation in Amazon deforestation in Amazon

International incentives essential International incentives essential

Conse

rvati

on n

eeds

Price

Region IIIRegion III

Restoration is essentialRestoration is essential E.g. Atlantic ForestE.g. Atlantic Forest Time lags give us limited time to actTime lags give us limited time to act Economists should focus on supply Economists should focus on supply

curve, not demand curvecurve, not demand curve What is most cost effective way to What is most cost effective way to

restore critical natural capital?restore critical natural capital?

Region IIIRegion III

Finance more important than valuationFinance more important than valuation Must combine polluter pays principle, Must combine polluter pays principle,

beneficiary pays principlebeneficiary pays principle Trace flows of damages and benefitsTrace flows of damages and benefits

Wealthy countries must finance Wealthy countries must finance provision of global public good benefits, provision of global public good benefits, pay for costs of global climate changepay for costs of global climate change ICMS ecologico good modelICMS ecologico good model

ConclusionsConclusions

Worst approach is to assign no value to Worst approach is to assign no value to environmentenvironment

Environmental valuation can help Environmental valuation can help determine when conservation is neededdetermine when conservation is needed Calls attention to problemCalls attention to problem Can help in allocation when ecosystems are Can help in allocation when ecosystems are

healthy, resilienthealthy, resilient Economic values never better than Economic values never better than

ecological knowledge—close collaboration ecological knowledge—close collaboration essentialessential

ConclusionsConclusions

For stressed systems, conservation needs For stressed systems, conservation needs must determine environmental valuesmust determine environmental values Economics take back seat to ecologyEconomics take back seat to ecology Many, many systems are stressedMany, many systems are stressed

Global effort required to protect globally Global effort required to protect globally interconnected ecosystemsinterconnected ecosystems Beneficiary countries should pay provider Beneficiary countries should pay provider

countriescountries Ecologists/life scientists must educate Ecologists/life scientists must educate

economists on thresholds, criticality of economists on thresholds, criticality of natural capitalnatural capital