Download Spreading Ecological Economics Through Contagion: Neoclassical

Environmental Valuation and its
Applications
Joshua Farley
Community Development and Applied Economics
Gund Institute for Ecological Economics
University of Vermont
The Problem
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Finite planet subject to laws of
thermodynamics…
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Can’t make something from nothing
Energy, required for all production
Raw materials, required for all economic
production, essential to human survival
And laws of ecology…
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Raw materials are structural building blocks of
ecosystems
Loss of structure + pollution = loss of life support
functions and other services, essential for survival
of all species
The Problem
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Result is serious biophysical threats to
human welfare and survival
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Climate change and other forms of pollution
Natural resource depletion
Loss of biodiversity and ecosystem services
Laws of economics
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When the marginal costs of an activity
exceed the benefits, halt the activity
Market fails to measure all costs and benefits
The Question
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Can monetary valuation of the
environment help us balance marginal
costs and marginal benefits?
We must truly understand the function of
prices/value to answer this question
Outline
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Function of prices in a market economy
and associated problems
Issues with monetary valuation of nonmarkets goods and services
When and how should we apply valuation?
Conclusions
Function of Prices in a
Market Economy
A Critical Perspective
Functions of prices
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Measure value
Maximize monetary value
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Allocation function
Rationing function
Measure scarcity
Accounting (briefly)
Prices as a Measure of Value
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Do Prices Reflect Value?
Diamond water paradox
Use value vs. exchange value
Exchange value = marginal value = price
Allocative function of price
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Apportions factors of production to
whatever industry is willing to pay the
most
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Generally the industry that can create most
monetary value
Maximizes monetary value across producers
Rationing function of price
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Apportions market products to whoever is
willing to pay the most
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Maximizes monetary value across consumers
Value is preferences weighted by
purchasing power
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One dollar, one vote
Do Prices Always Maximize
Monetary Value?
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Non-rival resource: use by one person
does not leave less for others to use
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Optimal price is zero
Many ecosystem services are non-rival
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Rationing is inefficient
Example of HCFCs and ozone hole
Is Monetary Value what we
want to Maximize?
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Eflornithine: Perverse outcomes?
What’s worth more, a tank full of ethanol
for a fat American, or a plate full of
tortillas for starving Mexicans?
Tyranny of the rich?
One dollar one vote or one person one
vote?
Price as measure of scarcity
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Scarcity  price increase  efficiency and
innovation
Does this even work for market goods?
Prices and Accounting
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Monetary value of
food and energy as
supplies contract
Health care and GNP
Conventional Economists:
Missing the point….
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Schelling (Nobel Memorial Prize in 2005):
“Agriculture and Forestry are less than
3% of total output, and little else is
much affected. Even if agricultural
productivity declined by a third over
the next half century, the per capita
GNP we might have achieved by 2050
we would still achieve in 2051.”
Issues with Valuation of
Environmental
Resources
Uncertainty, Ignorance,
Irreversibility and Complexity
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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
Incommensurability
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Not all things can be measured in same
units
How much for your daughter?
Future Generations
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Cannot possibly bid in today’s markets
Monetary valuation assumes they have no
rights.
Essential and Non-substitutable
Benefits
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Small changes in quantity lead to large
changes in value
Unless system is static, by the time
valuation studies are published, fed to
decision makers and integrated into policy,
they are wrong
When and How do we
Apply Valuation?
The Case of Critical Natural
Capital
Critical Natural Capital
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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
The Demand Curve for Natural Capital
Region 1
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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
Add value to cost of
conversion (e.g. tax)
Region II
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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
Conservation needs
Price
Region III
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Restoration is essential
E.g. Atlantic Forest
Time lags give us limited time to act
Economists should focus on supply curve,
not demand curve
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What is most cost effective way to restore
critical natural capital?
Region III
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Finance more important than valuation
Must combine polluter pays principle,
beneficiary pays principle
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Trace flows of damages and benefits
Wealthy countries must finance provision
of global public good benefits, pay for
costs of global climate change
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ICMS ecologico good model
Conclusions
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Worst approach is to assign no value to
environment
Environmental valuation can help
determine when conservation is needed
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Calls attention to problem
Can help in allocation when ecosystems are
healthy, resilient
Economic values never better than ecological
knowledge—close collaboration essential
Conclusions
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For stressed systems, conservation needs must
determine environmental values
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Global effort required to protect globally
interconnected ecosystems
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Economics take back seat to ecology
Many, many systems are stressed
Beneficiary countries should pay provider countries
Ecologists/life scientists must educate
economists on thresholds, criticality of natural
capital