Why (not) price nature?

A few remarks on today's debate on economic valuation of ecosystem services, here in Wageningen:

• Having two non-economists as the only speakers in a debate on economic valuation of ecosystem services led to the usual misconceptions of economics, some if which I will explain below.
• I have written most of what I can say about the issue in this post.
• In my three-species typology in that post, Dolf de Groot is a typical pragmatic ecologist: he literally called valuation "a necessary evil."
• The same typology might label Bram Büscher (a sociologist) a hardcore ecologist, but actually his arguments were more of a Marxist critique of economics and capitalism than of a moral nature (intrinsic value 'n all). In short his argument is that ecosystem degradation is caused by the logic of capitalism; pricing nature perpetuates that logic rather than abolishing it.
• De Groot claimed that "conventional economists ignore most externalities, like ecosystem degradation." As a conventional environmental economist, who has been working on nothing else for the past ten years than externalities and other market failures, and who meets hundreds of similar economists every year at the meetings of EAERE, AERE, IIFET, BIOECON, and so on, I found this very strange to hear, to put it mildly.
• Another statement by De Groot was that unlike pricing, valuing "is not about substitution." Economic valuation is ALWAYS about substitution. If you don't like the idea that people can be compensated for ecological degradation, don't do valuation. De Groot wants to have his cake and eat it too.
• It is a more general problem I have with the so-called 'ecological economists': a lot of their valuation work is poorly thought through, poorly executed, and done from a political agenda rather than out of scientific curiosity.
• Common mistakes by ecological economists are (1) not properly defining what they measure (like doing a stated preference survey among tourists to measure indirect use values); (2) aggregating values to such a scale that prices are bound to change (the most fundamental critique of Costanza et al.'s 1997 paper); (3) treating economic values like they would treat biophysical variables such as temperature or density (which are not context-dependent while economic value depends on what question you are asking).
• Büscher repeated the Suzuki fallacy that "externality" means "not part of the economic system"
• Büscher "did not have time" to propose an alternative to the capitalist system. Perhaps he should have a look at the historical alternatives to capitalism and their wonderful impact on the environment.
• Büscher quoted a Chinese philosopher (probably Sun Tzu) that "if you can get your enemy to speak your language you have won the battle" or something in that spirit. I don't agree. Economists study the rules of market allocation (property rights, taxation, and so on) to understand where such rules work and where they don't. This would suggest that our advice would always favour big business. But being market-friendly is not the same as being business-friendly.
• I'm in favour of pricing ecosystem services, but only in the context of concrete policy decisions, in a proper cost-benefit analysis that is part of a wider policy-making process that also takes into account other considerations besides economic value (such as intrinsic value, distribution of effects, and so on). Don't try to estimate the total value of the planet, as Costanza did.

Why economists argue with ecologists (6): Can we price nature?

Can we express nature's value in currency, such as dollars, euros, or yuan? I usually get one of the following three replies to this question.

The first is the hardcore ecologist:
"Most certainly not. Nature has a value in itself. Pricing nature is disrespectful to nature; it violates nature's intrinsic value; it's cynical and perhaps even blasphemous. Can't we just enjoy something without putting a price tag on it? Why does everything have to be expressed in money?"

The second is the hardcore economist:
"Well, duh. People have preferences. Do you prefer an apple or an orange? Do you prefer a highway or a forest? From preference orderings we can derive the amount of compensation people would need for building that highway. So of course we can price nature. We do it every time we make a choice between nature and something else."

The third is the pragmatic ecologist:
"I don't like it, but if we don't do it policy makers won't listen to us. Economists rule the world, so to promote nature conservation we need to speak the language of economists, and that is money. So I'll just hold my nose and price nature. But I will also remind people that the price tag does not mean that nature can be substituted for something else."

Believe it or not, but my view is closer to the hardcore ecologist than any of the other two. So what am I doing teaching monetary valuation of the environment next June?

When we do monetary valuation of, say, a coral reef, we don't value a coral reef. Does my wage say how much I am worth as a human being? (Boy, am I glad I never pursued that career in Dutch folk music.) No, at best it gives an indication of the value of the skills and expertise I am offering in the labor market as a teacher and researcher. Likewise, coral reef valuation aims to estimate the economic value of the goods and services provided by a coral reef, like diving tourism, coastal protection, or nursing juvenile fish. By "economic value" I mean how badly we want or need those goods and services, and how easy it would be to get them elsewhere if the coral reef disappears. That tension between how badly we want something and how easily we can get it is also called relative scarcity. Water is not scarce in The Netherlands, even though it is an essential resource. The fact that it is so easy to get makes that it has a very low market price. On the other hand, diamonds are hugely expensive, not because we need them so badly but because they are so difficult to come by. You rarely see newspaper headlines about the scarcity of people, but there is common mention of scarcity of skills or labor. The last time we put price tags on humans was during the shameful era of the slave trade. Likewise, monetary valuation does not, and should not, even pretend to price nature as such.

This view puts me at odds with the hardcore economist who argues that ethics can be fit in preference orderings and compensated for. I don't agree with this line of reasoning. It would imply that one person can block a policy if he finds it absolutely unacceptable - after all, he would require an infinite amount of compensation in order to be left "as well off" as without the policy. In practice we would call him a protest bidder and remove his data point from our analysis. Another problem is that this line of reasoning assumes that moral objections are purely individual. Moral considerations, however, typically pretend to hold for everybody. If I think eating meat is wrong, I can allow you to order a hamburger while still condemning it. If it were a purely individual preference, for instance if I would have no quarrels with eating meat but I simply don't like hamburgers, I would have no reason to condemn your ordering of a hamburger. So when we talk about the intrinsic value of a coral reef or a species, we have no other option but to debate it with others. The outcome of that debate may be that the majority dismisses the idea of an intrinsic value of a coral reef. But at least the argument would have its proper place in the political process, which it would not have if we tried to express it in a monetary value.

It also puts me at odds with the pragmatic ecologist. First, I find his line of reasoning insincere. If you think coral reefs are unique, unsubstitutable, and should be preserved for their own worth, just say so and don't start using economic value as an argument of convenience. Second, economic value implies substitutability, period. If I compensate you for the loss of an environmental asset, I substitute the environmental asset by something that makes you just as well off as with the asset. So I have substituted the asset by something of similar value to you. If I cannot substitute the asset by all the wealth in the universe, then its value must be infinite: hence Michael Toman's characterization of Costanza's $33 trillion paper as "a serious underestimate of infinity". Third, valuation should be done sincerely, and with the prime goal to make sure that all relevant information is available for public decisions. If you blur the line between moral considerations and purely economic ones, you will be tempted to overstate the economic arguments because the moral ones didn't work.

The bottom line is that when you do economic valuation, you need to define very precisely what it is you are measuring, and whether the methods you use answer the question you ask. I am deeply skeptical of measuring such notions as existence value (an economic value derived from no more than knowing something exists), because I doubt whether people understand the concept, and whether we will ever be able to distinguish it from moral considerations. But perhaps that is what the role of economists should be in this issue: to properly phrase the question, to explicitly lay out the arguments and considerations, and to quantify those considerations that can be quantified.

Mapping marine economics (2): Economic value of coastal and marine ecosystems

How bad is our current state of coastal and marine resources?

This question may get you browsing the websites of IUCN, Wetlands International, or other NGOs, looking for data on historical trends in coral reefs, endangered fish species, and so on. But whether and how fast coral reefs disappear is only half the answer to this question. Note that the question asks: how bad is it? So when we know the rate at which coral reefs are disappearing, the next question should be: how bad is it that they are disappearing?

It's what I call the nasty question: why do you want to protect the environment? The question sounds insulting, criminal even, as it seems to ignore a self-evident fact: surely the environment deserves protecting? But 'protecting the environment' can mean many things, ranging from eliminating emissions of substances that cause cancer (good) to saving the smallpox virus from extinction (not so good). I wrote in an earlier post that given the choice between tsetse flies and human beings, my sympathy is with the latter. In other situations, however, the choice is not so clear. Conserving sharks may sound like a laudable goal, but how many lethal shark attacks are we willing to accept? There are many such trade-offs in coastal and marine policy: mangrove conservation versus shrimp farming, wind energy versus fishing, port development versus tourism. We can't escape making explicit in what ways, and to what extent, ecosystems are important to us.

That does not necessarily mean putting a price tag on everything. If you want to argue that coral reefs are sacred, or that whales have a right to exist, and you can convince a majority of voters in your country of that view, go ahead. I may not agree with you personally (I'm more of a humanist), but professionally I have just as little to say about that as my fiddle teacher can fix my car. However, if we are talking about economic importance - how much do ecosystems contribute to human welfare - then I can give you a number of reasons why conserving coastal and marine ecosystems may be a good idea after all:

• Fish, the majority of which comes from marine sources, represents one sixth of global animal protein intake
• Coral reefs generate $9.6 billion worth of tourism each year
• During the 2004 Christmas tsunami, areas with intact mangrove forests suffered significantly less damage than areas without such coastal buffers

And so on. (Edward Barbier has written a very nice overview of the goods and services provided by coastal ecosystems. Best of all, it is free!) What economists do in this kind of issues is estimating how much coral reefs, mangrove forests, marine fisheries systems, and so on, contribute to human welfare - and yes, we try to express that contribution in dollars, euros, or other currency. This is done for two reasons. The most-cited reason is that if we don't make these estimates, policy makers may assume the economic value of such ecosystems to be zero. Although I see the merit in showing the importance of coastal ecosystems in a way that makes it possible to compare this value to the value of, say, laptop computers or refrigerators, I still see a danger that such 'raising awareness science' degrades into advocacy. In my view, the most legitimate reason to express the value of ecosystem goods and services in monetary terms is that big public projects, like development of ports or aquacultural areas, need to be appraised by the best information available. That means that a cost-benefit analysis of such projects should consider not only the costs of building the port and the income generated by using it, but also the effect it will have on, say, the damage suffered when the next tsunami comes along.

A lot of work has been done in this respect, and a lot of work still remains, as Barbier's article demonstrates. But I'm not going to do it. I have done valuation studies in the past, and occasionally I supervise students doing valuation surveys. But if you want to really make your mark in this domain you need to do nothing else, and I'm too much of a modelling person to focus on surveys and the statistics that go with them.

Yes, sometimes I agree with the critics of PES - but not always

Richard Conniff puts some question marks over PES in this piece. Most of it draws from an earlier article by Kent Redford in Conservation Biology, so let me go over the arguments laid out (rephrased in my own words - hoping I get it right) in this article. Be prepared: I actually agree with most of it, although I wholeheartedly disagree with some of it.

PES risks crowding out moral justifications for conservation
This is a risk. The risk is similar to the risk associated with social cost-benefit analysis, namely that the difference between monetised costs and benefits will become the only decision criterion so that non-economic arguments lose their voice in the political debate. This was the case when the USA (under Reagan) adopted its notorious Executive Order 12291, which stated that "Regulatory action shall not be undertaken unless the potential benefits to society for the regulation outweigh the potential costs to society." No wonder this put a stop to a lot of environmental policy, the benefits of which are most difficult to quantify. So yes, we should keep reminding our students, including economics students, that money is not the only argument in public decisions.

Pro-PES conservationists wrongly believe that all ecosystem services are good
Let me add to that: they even believe ecosystem services are good enough, i.e. good enough to justify conservation. But ecosystem services might not be good enough, and in that sense pro-PES conservationists should be careful what they wish for. But there the article makes an interesting statement (and now I do quote):

Nevertheless, not all ecosystem processes sustain and fulfill human life. Processes such as fire, drought, disease, or flood work against this goal, yet they are vital for ecosystem function, structuring landscapes, and providing vital services and regulatory functions to nonhumans. There is a danger that an economically driven focus on those “services” that are valuable to humans in their nature, scope, and timing may lead to calls to “regulate” ecosystem services to times and in flows that match human needs.

I would like to see Mr Redford explain to Zimbabwean farmers why they should learn to live with themselves, their children, and their cattle getting sick or even dying from sleeping sickness. I'm sure tse tse flies are valuable for some reptile species I should have heard of, but in this case my sympathy is with Homo Sapiens.

Some services may be better provided by species with nasty side-effects
Of course you should take into account nasty side effects, and then the outcome may be that you should still, or should not, use that exotic turbo species to provide the service. Indeed, you may not know the side effects, so precaution is mostly warranted in such cases.

PES may become an incentive to engineer ecosystems towards service provision, which may have nasty side effects
See above. Engineering an ecosystem towards provision of a single service can indeed increase the ecosystem's brittleness, like monoculture is efficient on the short term but very vulnerable to disease on the long term.

The methods currently used to establish monetary value are problematic
Tell me about it: the economic literature is rife with reasons why putting a price tag on nature can go wrong. But here is another interesting quote from the article:

Where markets do exist, the value of the services from different ecosystems will not reflect their diversity, but their desirability to human consumers.

Now we get to the hidden assumption made by a lot of biologists: ecosystem value = ecosystem diversity. This is a gap between biology and not just economics, but all of social science: social scientists argue that 'value' is, well, a value judgement - something that cannot be established objectively, period. Conservationists like to say we should preserve nature because it has 'intrinsic value', but what they should really be saying is that they think, or feel, or find that nature has intrinsic value. I hate to say this, but nature having intrinsic value is not a fact; it's an opinion. A very valid opinion, but there are many others in this whole conservation debate and the way it is being pushed by conservationists smacks of a dictatorial sort of self-righteousness.

PES can have terrible repercussions for (mostly poor) locals
Absolutely. One of the driving forces of deforestation is that nobody knows who owns the forest: is it the state, is it the logging company, or is it the native tribe living in it? Assign any of these three the property rights over the forest and this new rightful owner has the right to exclude all the others. And he will do so, especially when there is money to made! The new allocation may be efficient according to our economics textbooks but it may come at the price of unimaginable social disruption in the lives of local communities.

Property rights may not be able to deal with climate impacts
The argument is like this: if you assign property rights over some species to some owner, this owner may have a strong incentive to stop the species from wandering off when its climate zone starts shifting. Of course, in a well-working market, this owner would be better off buying land elsewhere to let his species neatly follow the change in climate zones, blah blah blah. But land markets are notorious for their institutional problems. Land use regulations, spatial externalities, transaction costs, and all kinds of other problems will throw sand in the machine. This is an interesting issue I hadn't thought of before. It reflects an interaction between institutional-economic problems and ecological dynamics I might want to look deeper into.

One on the house: paying people not to do nasty stuff
I didn't find the argument in the article, nor in Conniff's piece, but it is a problem: a lot of PES is actually paying people not to be nasty. For instance, Conniff gives an example of Vittel-Nestlé paying farmers to not pollute the environment. But pollution is a negative externality: it is a cost imposed by farmers on Vittel. Paying farmers to stop polluting may solve Vittel's problems on the short term, but it still artificially boosts the farming sector to a size bigger than optimal. The whole world might be better off with farmers doing their business in places where they do less damage, but this solution will actually draw farmers to this area: they get paid not to pollute, what more do you want?

PES is a neoliberal sellout of our democracy to big business
Of course I save the best for last: it is the remark made by the man I would love to see in a cage fight with James Delingpole. Of course I am talking about George Monbiot:

When governments and PES proponents talk about employing marketplace solutions instead of traditional regulatory approaches, [Monbiot] says, “what they are really talking about is shrinking democracy, shrinking public involvement in decision making, shrinking transparency and accountability. By handing it over to the market you are in effect handing it over to corporations and the very rich,” and to “a very plutocratic” decision-making process.

There you have it: more market inevitably means less democracy. Of course, everybody knows you can only have a fully functional democracy under socialism, isn't it?

My two hands, I mean cents, on Monbiot's anti-valuation rant

I am happy to say that James Delingpole and George Monbiot make my toes cringe in equal measure (don't you think they even look alike?). Whether it's about the leftist conspiracy to strangle the economy with cap-and-trade or the neoliberal commodification of our athmosphere by cap-and-trade, I always find it difficult to reach the end of their writings with the same blood pressure as when I started reading them.

This time it's Monbiot who writes yet another econophobic rant against Payments for Ecosystem Services: pricing nature is wrong, PES is just a slippery slope towards privatisation of nature, without markets we wouldn't be in this situation in the first place, blah blah blah.

Tim Worstall writes a rebuttal of Monbiot's piece in The Telegraph (indeed, Delingpole's home newspaper) where he makes two major points:

1. If we didn't try to estimate the value of nature in monetary terms, it would be priceless, which in today's world means worthless (and hence, defenceless);
2. It's not the establishment of property rights, but their absence that is driving overexploitation of natural resources. Monbiot's rejection of private property rights takes us back to the days when nature was a free-for-all, with all the depletion and extinctions that come with it.

Worstall's second point is very valid, and I'm glad somebody is making it (although I doubt it convinces George "markets are evil and governments are saints" Monbiot). His first point, however, raises two question marks, making me feel somewhat like the proverbial two-handed economist.

On my left hand, I admit (albeit grudgingly) that Monbiot has a point: there are more reasons to preserve nature than just its contribution to the economy. It's the classical dichotomy between utilitarian and deontological ethics: Worstall uses utilitarian arguments (show how important nature is and people will more likely preserve it), whereas Monbiot argues that it is simply morally right to preserve nature, because it has a value in itself regardless of how highly humans value it.

On my right hand (call it my Delingpole hand if you like), arguments like Worstall's first point make me suspicious. Too much research in this matter is being done to "raise awareness", "wake up the politicians", or something like that. It makes for terrible, politically biased science that accepts any wild guess as long as it gives a big number. People still seem to believe the global ecosystem is worth $33 trillion, although any serious economist can tell you that this number as well as the method used to arrive at it (and, indeed, the sheer idea of calculating a total value of the entire ecosystem) is nonsensical: economist Michael Toman called it "a serious underestimate of infinity." Moreover, when you price nature you should be aware that it may turn out not to be that valuable: perhaps it is still sensible to cut that forest and build a hospital instead. This is of course the outcome that folks like Monbiot dread; on the other hand, the folks who use the "raise awareness" argument gloss over it, or worse.

The bottom line is that economic valuation of ecosystem services is best done in the context of a concrete, well-defined policy question. Pricing nature improves that decision-making by making values visible that would otherwise be ignored, in a way that makes them comparable to goods and services that do have a market price. Prices can never tell the entire story (this is where I agree with Monbiot), but it is a laudable goal to make the cost-benefit analysis as complete as possible (which is where I agree with Worstall). But whatever you do, "raising awareness" is just about the worst reason to do it.

Economists need the softer social sciences

A follow-up to my remark on how few valuation studies include proper qualitative research: this remark was provoked by two travel cost studies presented at EAERE 2012. One looked at the effect that forest fires have on visit rates in Portuguese forests, whereas the other studied how people trade off entrance fees and mortality risk while visiting a nature reserve in Japan.

The Portuguese study reminded me of a paper by Erwin Bulte and others on what they called the 'outrage effect'. They found that people are willing to pay a lot more for conservation of Wadden Sea seals if you tell them the population suffers from pollution than if you tell them the seals suffer from a viral disease. I would expect something similar to happen with regard to forest fires. People might even appreciate a scorched patch of forest if you tell them it is part of a natural or at least indispensible process, but they would be apalled if the fires were caused by human carelessness. I would also expect it matters whether multiple hectares are gone, or whether there are only occasional blackened patches. The researchers did not ask their respondents what they thought was the cause of forest fires, but almost all forest fires in their region were man-made, and they assumed their respondents were aware of that fact.

The Japanese study reminded me of the Darwin Awards, or rather, the fact that most of its recipients are intoxicated, overconfident males. Suppose a respondent prefers a $20 dangerous hike over a $30 safe one, does that mean that he considers $10 too much to lower his risk of getting killed? Or does he (I'm afraid it's mostly a 'he') assume that bad stuff only happens to other people? In this case the researchers stated that it was widely known which hiking trails are dangerous, and that casualties have been all over the news. But that argument ignores how good some people are at downplaying risks - at their peril, indeed.

The bottom line for me is that too much economic research, especially the valuation stuff, seems to blindly jump into the issue, imposing wildly unrealistic assumptions on human behaviour, without doing proper explorative research first. Why not interview a few hikers first, to get an idea what considerations may be at play? Why not talk to a psychologist, or a sociologist, who has done research on how people view their own mortality risks?

I think economists should observe more, and take more heed of what other social scientists have found so far about human behaviour. Economics is a world apart from most other social sciences, notably sociology and anthropology. (Supposedly, an unnamed Hindu economist once claimed that bad economists reincarnate as sociologists.) But I think this is finally changing, as Economics Nobel prizes¹ are being awarded to behavioural economists and political scientists, and economic experiments have become fashionable enough to be published in top journals like American Economic Review.

So how does this relate to my own work? Besides other activities, my work involves modelling of how people exploit natural resources, and estimating how valuable those resources are to them. I think the time is ripe to do such work together with anthropologists and sociologists. I am about to start a research project on international cooperation in management of Pacific tuna, together with Simon Bush from Wageningen University's Environmental Policy Group. But I'll keep my eyes open for opportunities to do more such interdisciplinary work.

Footnotes:
1 Actually, I don't like calling the Economics Nobel an Economics Nobel. It's just that Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, as it is officially called, is a bit too long. But there is no such thing as a Nobel Prize for Economics. The only reason why there is an Economics prize that has "Nobel" in its name, and not, say, a similar biology prize, is that economists work at banks such as the Swedish central bank, and thereby have access to enough money to create the fund for such a prize. Unlike biology faculties.

My highlights from EAERE 2012

My highlights from the 19th annual conference of the European Association of Environmental and Resource Economists:

• I was surprised to see how crude estimates of travel costs still are in non-market valuations of recreational sites;
• Also, how few of those studies have done a proper qualitative analysis before they do their quantitative study;
• Linda Nøstbakken had a very nice paper on how a combination of diversified monitoring and self-reporting incentives can greatly enhance monitoring of fisheries legislation;
• Martin Quaas proposed using a "shadow interest rate" as a way of expressing the quality of fisheries management;
• Nick Hanley is a Les Paul man:

And rightly so; Fender people are evil.