Valuation and Market Systems

Putting a Price on Nature

Because the US market system is based on assigning values to natural capital, environmental economists have recognized the importance of putting a price on ecosystem benefits. This allows government agencies to gather hard data that support ecosystem conservation and environmental sustainability of market goods.  It also allows public figures to make conservation efforts a priority and maximize the environmental benefits in a dollar format.  

Although environmental resources are hard to quantify because many of their benefits are indefinable, Ecosystem Valuation is just one of many ways in which economists have tried to measure the value of various ecosystems. Ecosystem valuation allows policy makers to assign a monetary value to both natural capital (and its resources) and the services that those resources provide to the public.

Valuation Process

The market value of environmental resources converted to some commercial use may fail to reflect the lost environmental benefits. Development decisions are therefore often biased in favour of those uses of environmental resources which do have marketed outputs.

Economic valuation is the attempt to assign quantitative values to the goods and services provided by environmental resources, whether or not market prices are available to assist us. The economic value of any good or service is generally measured in terms of what we are willing to pay for the commodity, less what it costs to supply it. Many environmental resources are complex and multifunctional, and it is not obvious how the myriad goods and services provided by these resources affect human welfare.

Concept of Total Economic Value (TEV) provides such a framework and there is an increasing consensus that it is the most appropriate one to use. Simply put, total economic valuation distinguishes between use values and non-use values, the latter referring to those current or future (potential) values associated with an environmental resource which rely merely on its continued existence and are unrelated to use (Pearce and Warford, 1993). Typically, use values involve some human ‘interaction’ with the resource whereas non-use values do not.

Use values are grouped according to whether they are direct or indirect. The former refers to those uses which are most familiar to us: harvesting of fish, collection of fuelwood and use of the wetlands for recreation (Table 2.1 lists several others as well). Direct uses of wetlands could involve both commercial and non-commercial activities, with some of the latter activities often being important for the subsistence needs of local populations in developing countries or for sport and recreation in developed countries.

 

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http://www.ramsar.org/cda/en/ramsar-pubs-books-economic-valuation-of-21378/main/ramsar/1-30-101%5E21378_4000_0__

Table 3.1: Using an example from Central America, this graph illustrates the importance of determining and ranking the relevant direct and indirect use and non-use values for different wetland systems. The two examples involve a freshwater wetland system in Guatemala Identifying system and analytical boundaries, listing characteristics and values and ranking them in terms of importance to the assessment are all important steps in defining the information required for the analysis. If these information needs are correctly appraised, it is easier to determine the resource constraints to obtaining this information, the data collection methods required and the appropriate choice of valuation techniques.

 

http://www.greensage.com/ezine/10Oct07/ezine10-07Twenty.html

Biodiversity and the Market Systems

The key difficulty is in placing a value on those services that biodiversity provides and attempting to internalize the externalities caused by the unsustainable use of natural capital. As most biodiversity and ecosystem services are public goods – this also concerns the tragedy of the commons. What to do?

To date, there has been no clear evidence that good biodiversity management has given a competitive advantage, or that poor biodiversity management has led to revenue loss. However, extractive companies, unlike the majority of their shareholders, are used to planning for 30-50 year scenarios, and their move towards better biodiversity risk management indicates a long-term view of where the materiality of the biodiversity debate is heading — particularly the ability of companies to access and exploit land and marine areas.

A greater awareness of environmental impacts and opportunities related to climate change, and in part to the greater awareness of government, regulators, civil society and the media about biodiversity loss and the concept of ecosystem services. The actions identified above that governments could take would raise the material worth of biodiversity more quickly in the financial markets. Irrespective of what mechanisms government may chose to implement, as natural resources become more scarce, and ecosystems no longer deliver the services that companies have come to rely on, the effects will be felt in the financial markets.

 

Sources

"Economic valuation of wetlands: a guide for policy makers and planners." The Ramsar Convention on Wetlands. 23 November 2009. <http://www.ramsar.org/cda/en/ramsar-pubs-books-economic-valuation-of-21378/main/ramsar/1-30-101%5E21378_4000_0__>

"Ecosystem Valuation." Environmental Literacy Council. 2002. <http://www.enviroliteracy.org/article.php/1320.html>

King, Dennis M. et al. "Ecosystem Valuation." US Department of Agriculture, Natural Resources Conservation Service, NOAA. 2000. <http://www.ecosystemvaluation.org/>

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