Eco-Economics: Valuing Eco-Services

During my recent visit to the Monterey Bay Aqarium, I picked up a book called "Eco-Economy" [web PDF version]. It offers an overview of our key eco-challenges (one word, folks: water) and tries to paint an outline of what a more sustainable future economy might look like. I have a few issues with it, but it's useful to anyone interested in ecology & economics - or looking for "watch this" pointers as they scan the world for future trouble spots. The book would make a great companion to Barnett's work on The Pentagon's New Map, for instance. More on that aspect another time.

In this post, I'm going to focus on another key insight: What if we gave economic values to the the services ecosystems provide, not just the products you can get by harvesting them? For instance, a forest's services could include:

• Flood control (very expensive when it fails)
• Maintenance of other industries (i.e. salmon fishing)
• Purification of drinking water for nearby communities
• Recreational services
• Transport of water inland (break the forest transport chains, and you create inland droughts).

As you can see, removing these services can get expensive. Quickly. That's why "eco-services" is a really key concept, because it works with economics to change the cost:benefit picture in a sensible way. After all, when these services fail, guess who pays? This example of subsidized idiocy right here in North America drives the point home:

"...over several decades the U.S. Forest Service used taxpayer money to build roads into national forests so logging companies could clearcut forests. This not only artifically lowered the cost of lumber and paper, it led to flooding, soil erosion, and the silting of streams and rivers. In the Pacific Northwest, it destroyed highly productive salmon fisheries. And all of this destruction was underwritten by the taxpayer." [from Eco-Economy]

A Worldwatch paper on subsidies and the environment was part of the source material for the above quote, and its key points make perfect sense to this right-winger.

For more general background on the concept of valuing ecosystem services, The Value of the World's Ecosystem Services and Natural Capital, (Robert Constanza and 12 collaborators, Nature: Volume 387 no 6230, 1997) is generally considered to be the seminal piece. For a less academic treatment of the concept, however, try this example on for size:

Who'll Stop the Rain?

In 1998, China's Yangtze River basin in China experienced the worst flooding in its history. 120 million people were driven from their homes, and damage was over $30 billion. That's a lot of rain! Isn't it? Actually, rainfall was above average, but not close to being a record. The missing link? The Yangtze basin has lost 85% of its original tree cover, which would otherwise work to hold in the rain. Result: massive flooding downriver.

Now that's expensive.

Chiense authorities are now banning tree-cutting in the Yangtze basin's upper reaches, and launching a reforestation program. Apparently the state logging companies are now applying their inefficiencies as tree-planting organizations. Progress, of a sort. Meanwhile, China's southern areas are being hit with floods right now. The general predictions are that flood damage in China will continue to rise in future years.

To see the benefits of a broader and smarter strategy, all the Chinese have to do is look slightly east. South Korea's very successful reforestation program has helped it control flood damage, in sharp contrast to North Korea's regular problems in this area (I guess it's hard to keep trees up when your adherence to Marxist economics forces people to eat them).

This problem is absolutely not unique to China, but the Chinese experience is an excellent illustration of just how valuable forests' flood-control services alone can be. In some cases, this service alone may outweigh the value of logging and selling the wood.

Nor is this the only large-scale economic service that forests provide.

Who'll Start The Rain?

Now let's extend our look at the value of forests to another critical area that's likely to have global trouble-spot implications down the road: water transport. From Eco-Economy:

"While deforestation accelerates the flow of water back to the ocean, it also reduces the airborne movement of water to the interior. The world's forests are in effect conduits or systems for transporting water inland. Eneas Salati and Peter Vose, two Brazilian scientists writing in Science, observed that as moisture-laden air from the Atlantic moves westward across the Amazon toward the Andes, it carries moisture inland. As the air cools and this moisture is converted into rainfall, it waters the rainforest below. In a healthy rainforest, roughly one fourth of the rainfall runs off into rivers and back to the Atlantic Ocean. The other three fourths evaporates and is carried further inland, where the process is again repeated. It is this water cycling capacity of rainforests that brings water inland to the Amazon's vast western reaches.

If the rainforest is burned off and planted to grass for cattle raising, then the cycling of rainfall is dramatically altered - three fourths of the rainfall runs off and returns to the sea the first time it falls, leaving little to be carried inland. As more and more of the Amazon is cleared for cattle ranching or farming or is degraded by loggers, the capacity of the rainforest to carry water inland diminishes. As a result, the western part of the forest begins to dry out, changing it into a dryland forest or even a savanna

The burning and cutting of the Amazonian rainforest could also affect agriculture in regions to the south.... Efforts to boost farm output by clearing land in the eastern Amazon basin could reduce farm output in southwestern Brazil.... A similar situation may be developing in Africa.... As the forest area shrinks, the amount of rainfall reaching the interior of Africa is diminishing. A comparable trend is unfolding in China...."

As you can see, the Amazon is just one example. Wang Hongchang of the Chinese Academy of Social Sciences notes that deforestation in China's south and east is reducing the moisture transported inland, and contributing to a growing dust bowl in the northwest. In April 2001, the dusty haze that hung over a number of western Canadian and American cities was, in fact, soil from this area of China.

Why Should We Care, and What Should We Do?

All very interesting, but why should we care? Two reasons:

1. Some of the problem is subsidized by unwise projects financed by foreign aid or domestic subsidies, and some opportunities to improve our situation are being missed because their returns are being understated.

A model that assesses "environmental impacts" after the fact is better than nothing, but it is vastly inferior to a model that factors in the value of eco-services beforehand.

It's certainly worthwhile to cosider this dimension when evaluating aid and development projects, for instance, and measuring their return. On the domestic front, setting eco-services valuations and factoring them into certain permit costs could have subtle but substantial consequences. In the forestry sector, for instance, it would make damaging logging practices less cost effective, remove subsidies that currently discourage more efficient use of wood and paper, and boost the demand for recycled products. If our economics tell more of the truth, people will act in wiser ways.

Perhaps it's also time to factor these eco-services into a variant of GNP, so their depletion and restoration would both show on a national balance sheet. This move would highlight the depletion of economically valuable natural capital, and also reward efforts like South Korea's tree planting and U.S. subsidies that encourage sequestration of marginal farmland by showing them as the investments that they are.

2. Water is going to be a growing source of conflict, as countries run up against their limits and international disputes over water rights escalate.

In other words, poor environmental practices are storing up international trouble down the road. If I had to look at only one environmental variable to add to The Pentagon's New Map, it would be water availability - and the availability of the services that forests provide can either help to address this problem or act to worsen it.

As a conservative, I believe in economics and free markets. Hayek's point about a distributed market's superior intelligence and ability to respond to signals remains as true today as it was when he wrote The Road to Serfdom.

In order to work properly, however, our market signals have to tell us more of the truth.

The idea of a natural environment that provides us with potential products that can be sold, and existing services that should be accounted for, strikes me as a better and more honest way of managing our resources. Eco-services is an important idea whose time has come.

--- UPDATES ---

• Crumb Trail says "it must be eco-economics week," and steps in with some commentary in Connections - see also my comments there.

• Crumb Trail also have eco-economics posts like Valued Assets, where they note some of the traps to avoid and the need to work with and not against private property holders. Who Pays? takes this theme one step further, noting the importance of local support for successful conservation. You can't just say that the cost part of conservation that is "borne by local people prevented from exploiting the resources around them", they note, and advocate that they just give a free ride to the rest of society. It's unfair and won't happen. Agree. I think eco-services would help that society better understand the value, and so find the price point and conservation point that made sense for all parties. If the market signals are more truthful, that should become less of a political/enforcement task and more of a market/equilibrium task.

• Economist Armnold Kling has some thoughts. My first response is that in many cases, the government is the property owner, so their interest is direct. Plus, their subsidies and aid programs often contribute to the problem. Private coalitions and lawsuits are useful to a point, but they would not remove these issues. The ability to price ecosystem services and factor that into permitting, sales, and program evaluation, however, would address flaws and opportunities that no private system I've yet seen would handle. With that information added to the mix, fire sales, special favours and foolish programs/subsidies could be exposed much more quickly for what they are.