Ecosystem Valuation: A step forward?

Dr. Adhikari provided an exceptionally thorough analysis of key terms and theories on economic valuation, which proved insightful and eye-opening to someone with little economics background.

“How valuable is an ecosystem?” and “to whom?”[1] are core questions to ask from an economics perspective, when thinking of possible ways to increase awareness of decision-makers around the protection of ecosystems. In instances where there are negative externalities resulting from the productive or consumptive activities that inflict involuntary costs on others, the generators of externalities only consider private costs of the economic activity and ignore the social costs they place on others.  The receivers of the service or good (or natural resource in the context of water) incur these social costs in the form of health problems or clean-up costs.

Seeing that water was discussed as having an inefficient and uncompetitive market (no Pareto efficient-meaning it cannot be reallocated to one party without making another party worse off), with a low social surplus, and users prefer to ‘free-ride’ on the provision of this good (tragedy of the commons), it becomes quite difficult to control or to place a value on it.

Various measures were presented to resolve the dilemma including voluntary provisions (i.e tax incentives, reward conservation behaviours), market-oriented measures (i.e cap and trade) and state “command-and-control” mechanisms. Three systems in particular caught my attention:

1) PES (payment for environmental systems)- private payments. This system entails that those downstream pay upstream parties to conserve or preserve the resource.  The idea is that the payment will act as an incentive for those upstream to change their behaviour from exploitation to conservation.

My question concerning its effectiveness is: how can one guarantee that those upstream will in fact change their behaviour or even want to in every case (even with an incentive)? 

Moreover, how equitable is it to make those who are the “victims” in this scenario, pay an additional price for the sake of conserving the resource, while those exploiting the resource get incentives? From an economics perspective this may be seen as a win-win situation, however, moral questions arise when those downstream cannot afford to pay the cost/incentive to change the upstream party's behaviour. How can their dilemma be resolved?


2) Government monitoring. This system requires greater government control by setting legal mechanisms (i.e fines and taxes) to control exploitation of the resource.

Although this system seemed the most convincing to me at the time, Dr. Adhikari soon clarified for me the issues. At times, the cost of compliance can be too high and there is no incentive for governments to implement legal mechanisms. For one reason, there may be political corruption which will falter the system even if it is created, and secondly, governments may fear stifling production by adopting such measures.

3) Public Payments. I found this system to be rather reasonable but certainly not without its caveats. In this system, governments pay entities (such as farmers, NGOs) to conserve particular ecosystems. This has been taking place in countries like Ecuador (where municipal water and electrical utility companies each donate 1% of water revenues for watershed protection), and in Costa Rica among other places. Although this system contributes to the conservation initiatives of certain ecosystems, does it limit or prevent the exploitation of the resource at the level of consumption? 

On this note, water governance is a complex and controversial issue. However, if water can be valuated, then perhaps this will increase its appreciation and conservation. A final question which merits further research on my part is: if water were to be at some point valuated, and a price were to be set, would that be more conducive to changing individuals' or companies’ exploitative behaviour- or would it present an opportunity for private interests to monolopolize the market supply for water, now that a price has been set for it (and a market has been created)? 

* I plan to post a blog over the break regarding water laws in Kenya in preparation for our February trip- stay tuned for that! 

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[1] How Much is an Ecosystem Worth? Assessing the Economic Value of Conservation. The World Bank/IUCN/The Nature Conservancy. IBRD/World Bank, Washington DC, 2004.