Environmental Economics and Policy

Lynne Lewis, Thomas H. Tietenberg

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429995118
• Edition: 7
• Topic: Business
• Subtopic: Business General
• Index: Business

Environmental Economics and Policy is a best-selling text for environmental economics courses. Offering a policy-oriented approach, it introduces economic theory, empirical fieldwork, and case studies that show how underlying economic principles provided the foundation for environmental policies.

Key features include:

• Introductions to the theory and method of environmental economics, including externalities, benefit-cost analysis, valuation methods, and ecosystem goods and services.
• Extensive coverage of the major issues including climate change mitigation and adaptation, air and water pollution, and environmental justice.
• Boxed "Examples" and "Debates" throughout the text, which highlight global examples and major talking points.

This text will be of use to undergraduate students of economics. Students will leave the course with a global perspective of how environmental economics has played and can continue to play a role in promoting fair and efficient environmental management.

The text is fully supported with end-of-chapter summaries, discussion questions, and self-test exercises in the book. Additional online resources include references, as well as PowerPoint slides for each chapter.

Section II

Environmental policy

Chapter 6
Ecosystem goods and services

Nature’s threatened bounty

Introduction

In the last chapter, we learned about the methods available for valuing environmental goods and services and damages to those goods and services. We looked at examples for use values such as recreation, but also for passive/nonuse values. Many of the ecological functions and services are not only supplied by natural processes, but nature charges nothing for their use. Examples of these ecological goods and services include pollination by bees, the aquifer recharge services by wetlands, breathable air, biodiversity, nitrogen fixation in the soil, climate regulation through carbon sequestration, as well as aesthetic and recreation services. If these services directly benefit at least one person, they are called ecosystem services.

In 1997 a team of researchers attempted to place a monetary global value on ecosystem services (Constanza et al., 1997). Basing their estimates on previously published studies and “a few original calculations”, they found the (1997) economic value of 17 ecosystem services for 16 biomes to be in the range of US$16–54 trillion per year, with an average of US$33 trillion per year (approximately $49 trillion in 2014 dollars), a number significantly higher than global GDP. This article attracted considerable attention.

However, because the methods they used were controversial, the specific estimated values were controversial as well. In 2014, Costanza and colleagues updated their 1997 estimates. Using the same controversial methods, they suggest that the value of total global ecosystem services in 2011 was $125 trillion assuming changes to land areas and $145 trillion assuming no changes to the biomes. They also found that since the earlier study in 1997, losses to ecosystem services due to land use changes were $4.3–$20.2 trillion/year. What is not controversial, however, is the fact that ecosystems play a very valuable role in the lives of humans.

What role can economic analysis play in assuring that the value provided by these ecosystem services is not only recognized, but also protected from degradation? In this chapter we take up that question, focusing on two specific roles: (1) refining and improving the methods for quantifying the values received from natural services to increase their reliability and to demonstrate their importance, taking care to identify the specific contributions to human welfare; and (2) facilitating the design of private, public, and public-private partnership arrangements as well as incentive mechanisms that can help protect these important components of nature from degradation.

The state of ecosystem services

In 2001, U.N. Secretary-General Kofi Annan initiated the Millennium Ecosystem Assessment (MA) with the goal to assess “the consequences of ecosystem change for human well-being and to establish the scientific basis for actions needed to enhance the conservation and sustainable use of ecosystems and their contributions to human well-being.”

To examine the connections and the linkages between ecosystems and human well-being, the MA divides ecosystem services into several categories.

• Provisioning services provide direct benefits such as water, timber, food, and fiber.
• Regulating services include flood control, water quality, disease prevention, and climate.
• Supporting services consist of such foundational processes as photosynthesis, nutrient cycling, and soil formation.
• Cultural services provide recreational, aesthetic, and spiritual benefits.

In 2005, the Assessment published four main findings.

• Ecosystems have changed rapidly in the last 50 years – at a rate higher than any other time period. Due to the growing demands on the earth’s resources and services, some of these high rates of change are irreversible.
• Many of the changes to ecosystems, while improving the well-being of some humans, have been at the expense of ecosystem health. Fifteen of the 24 ecosystems evaluated are in decline.
• If degradation continues, it will be difficult to achieve many of the U.N. Millennium Development Goals since resources that are vital for certain especially vulnerable groups are being affected.¹ Further degradation not only intensifies current poverty, but it limits options for future generations, thereby creating intergenerational inequity.
• Finally, the Assessment suggests that reversing the degradation of ecosystems would require signifi-cant changes in institutions and policies and it specifically notes that economic instruments can play an important role in this transformation.

Another report, the Economics of Ecosystems and Biodiversity (TEEB), examines the costs of policy inaction on the decline of biodiversity worldwide. It finds that by 2050 under several “business as usual” scenarios, an additional 11 percent of remaining biodiversity could be lost, 40 percent of low-impact agriculture could be converted to intensive agriculture and 60 percent of coral reefs could be gone (perhaps as early as 2030).

Recognizing the importance of ecosystem services the Intergovernmental Platform on Biodiversity and Ecosystem Services (IPBES) was established in April 2012 as an independent intergovernmental body open to all member countries of the United Nations. IPBES provides a forum for synthesizing, reviewing, assessing, and critically evaluating relevant information and knowledge generated worldwide on biodiversity and ecosystem services.

Economic analysis of ecosystem services

Ecosystem services are flows that are generated from stocks of natural assets and that benefit humans. Tropical forests, for example, are assets that can provide carbon sequestration, habitat, watershed protection, and recreation, but also can provide flows of timber. The harvest of flows can either be sustainable or unsustainable.

Economic analysis is helpful both in identifying sources of economic degradation and in evaluating possible approaches to maintain and restore these services. Both of these tasks are enhanced by careful valuation of the flows in question.

One avenue for using these valuations is benefit-cost analysis and the scope for these analyses is wider than you might expect. They are not limited to traditional evaluation of water or land use projects. Bandara and Tisdell (2004), for example, use the results of a contingent valuation study on saving the Asian elephant to show that the WTP for the conservation of Asian elephants in Sri Lanka more than compensates for the damage caused by elephants.

Demonstrating the value of ecosystem services

The starting point for economic analysis in reversing ecosystem degradation lies in revealing the economic value forgone by the loss of these services. Quantifying those values, even imperfectly, can make it clear just how much their loss or degradation means.

Many of the services explored in this chapter are nonmarket goods or services, which means that we must use a methodology that does not depend on the availability of market prices to derive their value. As discussed in Chapter 5, two main strategies are available for eliciting these values: revealed preference methods – attributing value by observing or measuring what people spend on goods and services that contain attributes we wish to value – and stated preference methods – using surveys to ascertain willingness to pay. Other methods commonly used for valuing ecosystem services include using adjusted market prices, avoidance costs (or averting expenditures), production function methods, or damage costs avoided.² Here we will focus specifically on valuing services that ecosystems provide to humans either directly or indirectly.

Consider some specific contexts to illustrate both how these techniques can be applied to the valuation of ecosystem services and why the results matter.

The value of reefs

Coral reefs are an integral part of an extensive and vital landscape of coastal ecosystems. Increasingly they are in jeopardy. One of the specific areas benefited by the new field of ecosystems services research is not only the derivation of better estimates of the value of those ecosystem benefits, but also the identification of the specific sources of that value.

While some of the threat to coral reefs is due to pollution or overfishing, recently coral reef losses have accelerated significantly due to climate change. Specifically, rising water temperatures have induced coral bleaching, and excessive CO₂ dissolution in seawater is causing ocean acidification, which in turn hampers reef regeneration.

What is at stake? Just how valuable are the services provided by coral reefs? And how much do the four different categories of services contribute to the overall value?

One well-known study (TEEB, 2009) provides some relevant estimates to answer these questions by pulling together the existing literature on values of reefs in a global context. Table 6.1, drawn from that study, not only demonstrates that reefs provide valuable ecosystem services, but it also divides up the sources of value into the four categories described at the beginning of this chapter.

Note that this study finds that cultural services (particularly tourism and recreation) make the largest contribution to value. The clear implication is that studies that capture only the provisional services from coral reefs seriously underestimate this value.

One use of this type of estimate would be in calculating the reef degradation damages from climate change, a calculation that would be useful in designing climate change policy. Equivalently, the estimates could be used to derive the benefits from reducing that damage via greenhouse gas mitigation policy.

Because the TEEB study aggregates the results from a number of individual studies, it would be helpful to have some sense of what an underlying individual study might look like. What does it include? What methods are used to derive the estimates? What uses are anticipated for these estimates? Example 6.1 provides some insights from one study that help to answer these questions.

Table 6.1 Benefits from Ecosystem Services in Coral Reef Ecosystems

For the entire United States, the value of coral reefs has been estimated at $3.4 billion per year including fisheries tourism and coastal protection (NOAA, 2019). Included in this number is $94 million per year in flood damages that coral reefs help protect. In Chapter 11 we will revisit this with a discussion of increased flood risks from climate change.

EXAMPLE 6.1

The value of coral reefs in the U.S. Virgin Islands

The United States Virgin Islands (USVI) are located approximately 100 miles east of Puerto Rico by air. The four main islands are St. Croix, St. John, Water Island, and St. Thomas.

Recognizing the value of the local coral reefs and needing a baseline to provide a quantitative measure with which to compare possible alternative development/conservation plans, a study was commissioned to derive a total economic value (TEV) for these reefs. A TEV framework attempts to measure value from both use and nonuse values. This information was also felt to be useful in providing an economic basis for advocating for the preservation of these coral reefs, for establishing the basis for any damage compensation, and for determining potential user fees for residents and tourists.

This study focused on valuing the six main uses of coral reefs and adjacent habitats in selected sites on the USVI: (1) fishery value, (2) tourism value, (3) recreational and cultural value, (4) real estate value, (5) the value of shoreline protection, and (6) education/ research values.

The study involved a wide range of valuation methodologies including (1) a revealed preference study of the commercial value of the fishery, (2) a local resident survey aimed at estimating the local cultural and recreation attachment to the marine environment, (3) a tourist survey using both travel cost and choice experiment methods to get a comprehensive insight into the importance of the marine environment for visitors to the USVI, (4) an analysis of the coastal protection function of reefs, (5) a hedonic pricing analysis to discern the positive impact of healthy reefs on house prices, (6) a GIS analysis aimed at preparing value maps of the coral reefs of the USVI, and (7) an aggregation of the separate components to produce the estimation of the TEV of these coral reefs.

This study found the TEV to be $187 million per year, with the values of the component parts found to be as follows:

• Reef related tourism – $96 million
• Recreation – $48 million
• Amenity – $35 million
• Coastal protection – $6 million
• Support to commercial fisheries – $3 million

Note that tourism and recreation once again comprise the largest sources of value for this individual case as it did for the global total considered previously. Hurricanes Irma and Maria in 2017 caused widespread devastation in the Car...