Project update

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Project update

• Each step builds on the previous step
• Your problem statement uses your literature
  review to tell a story. The story will conclude
  with your goals. Objectives are the steps you
  take to achieve your goals. Methods explain how
  you will achieve your objectives.

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Environmental Valuation
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The Question

• Can monetary valuation of the environment help us
  balance marginal costs and marginal benefits of
  economic decisions?
• Can it help us solve the macroallocation problem?

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Functions of prices

• Measure value
• Maximize monetary value
• Allocation function
• Rationing function
• Does it work? Non-rival goods
• Is it what we want?
• Measure scarcity
• Accounting

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Conventional Valuation Methods

• Direct market value
• Indirect market value
• Avoided cost
• Replacement cost
• Factor income
• Travel cost
• Hedonic pricing
• Contingent valuation
• WTP
• WTA
• Loss aversion

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Current Applications

• Cost Benefit Analysis
• Internalizing externalities (e.g. green taxes,
  assurance bonds, etc.)
• Policy decisions (e.g. climate change,
  biodiversity loss)
• Regulatory choices (e.g. leaded gasoline)
• Expenditure decisions
• Damage assessments
• National accounts
• Calling attention to the problem

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What is CBA?

• Can the winners potentially compensate the
  losers?
• Potential Pareto Optimality

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Discounting

• How do we deal with future values (costs and
  benefits)?
• Opportunity cost
• Pure time preference
• Richer future
• Uncertainty

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Incommensurability

• Can all things can be measured in same units?
• How much for your daughter?

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Uncertainty, Ignorance, Irreversibility and
Complexity

• Emergent phenomena, surprises, thresholds
• Amazon, rainfall and the Cerrado
• Mata Atlantica, habitat loss, extinction and time
  lags
• Monetary values can be no more accurate than
  ecological knowledge

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Future Generations

• Cannot possibly bid in todays markets
• Monetary valuation assumes they have no rights.

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When and How do we Apply Valuation?

• The Case of Critical Natural Capital

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Critical Natural Capital

• Components of natural capital that are essential
  to human survival and for which there are no
  adequate substitutes
• Ecological thresholds
• Interdependent elements of complex system

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The Demand Curve for Natural Capital
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Region 1

• E.g. forests in Vermont
• Price can determine conservation needs
• Estimate monetary value, provide information to
  decision makers, feed into market price (e.g.
  green taxes)
• Only appropriate when rate of change in value is
  slow, i.e. region I
• Far from threshold, errors not that important

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Region II

• Estimated price very sensitive to errors
• Let knowledge of thresholds and other ecological
  criteria determine conservation needs
• Conservation needs then determine price
• Prices adjust to conservation constraints much
  more rapidly than ecosystems adjust to prices.
• E.g. laws (unenforced) limiting deforestation in
  Amazon
• International incentives essential

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Region III

• Restoration is essential
• E.g. Atlantic Forest
• Time lags give us limited time to act
• Economists should focus on supply curve, not
  demand curve
• What is most cost effective way to restore
  critical natural capital?

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Region III

• Finance more important than valuation
• Must combine polluter pays principle, beneficiary
  pays principle
• Trace flows of damages and benefits
• Wealthy countries must finance provision of
  global public good benefits, pay for costs of
  global climate change
• ICMS ecologico good model

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Integrative, applied methods

• What is the value of salmon in the Puget Sound
• ARIES http//www.youtube.com/watch?v5yHnUTPADMw

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Conclusions

• Worst approach is to assign no value to
  environment
• Environmental valuation can help determine when
  conservation is needed
• Calls attention to problem
• Can help in allocation when ecosystems are
  healthy, resilient
• Economic values never better than ecological
  knowledgeclose collaboration essential

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Conclusions

• For stressed systems, conservation needs must
  determine environmental values
• Economics take back seat to ecology
• Many, many systems are stressed
• Global effort required to protect globally
  interconnected ecosystems
• Beneficiary countries should pay provider
  countries
• Ecologists/life scientists must educate
  economists on thresholds, criticality of natural
  capital