a publication of the
Environmental Associates

Know Your Environment

The Value of Ecosystem Services

Free, Priceless or Negotiable?

by Roland Wall, August 2000

  1. Taking stock of natural capital
  2. The economics of ecology
  3. Setting the prices
  4. References
  5. Further Reading
cypress swamp
The Best Bargain Anywhere: Swamps may
not look like they have much economic
benefit, but wetlands like this one provide
billions of dollars worth of free services by
filtering water, controlling floods and
capturing waste products.

Taking Stock of Natural Capital

Ask yourself, how much would I pay for a sip of water? What about a breath of fresh air or a handful of fertile soil? What's a warm breeze or a blue sky worth in dollars and cents?

These may sound like trivial questions—after all, who would you pay? But what if these items were scarce? Wouldn't they, seem priceless? Wouldn't they become the most valuable and expensive products in the world?

As populations grow and global resources become strained, a few scientists are starting to ponder just such questions. Their goal is to understand the value of natural systems like air and water in terms of the human economy.

Some writers have suggested that the ecosystem provides a range of free services that we take for granted, and that we may be in the process of squandering.

A quick mental exercise will help you appreciate the value of all of the benefits that our planet gives us for free.

Tomorrow morning, when you step outside, take a deep breath. You probably would have anyway—we all do, usually about 1200 times an hour. This time, though, take a moment, and think about what you just inhaled.

Nowhere else in the universe have we yet found this perfect combination of gases to support life. Students of the Earth's atmosphere sometimes call it the "Goldilocks" effect - everything in it seems "just right."

The oxygen that you're breathing as you walk out the door is actually quite unusual. Astronomers rarely find signs of it on other planets. In its pure gaseous state it's unstable, prone to bursting into flame. On Earth, however, a remarkable combination of biological and geochemical systems keep it in just the "right" proportion—around 20% of the atmosphere. Enough to keep us alive but not so much that a hot day would make the lawn combust.

Eighty percent of the atmosphere is nitrogen. It blankets the Earth in a stable, non-reactive form, harmless to humans but—as we'll see—also critical to life. Along with nitrogen are tiny traces of other gases to which most of us remain happily oblivious. Some of these, like argon, are inert. Others, like carbon dioxide (which will be released when you exhale), have specific roles to play in a sort of "biogeochemical ballet."

Now, walk out the door and get your morning paper off the curb. It might be cold enough that you had to pull on a coat to get to the sidewalk or maybe its warm, so you only need a bathrobe. It won't, however, be so hot that your blood boils, nor will it be so cold that your heart seizes up. Either of these could happen if you took this stroll anywhere else in the solar system.

Again gases in the atmosphere make the difference. Like the glass of a greenhouse, the trace gases in the atmosphere—particularly carbon dioxide and methane—serve to hold in heat at temperatures that we have evolved to find survivable (if not always comfortable.)

Back inside, you're making a bowl of cereal. Fortunately, well before the cereal got to the grocery store shelf, some molecules of carbon dioxide (exhaled by you or one of the other countless animals on earth), found their way to a farm and entered the cells of wheat plants.

This carbon dioxide became the carbohydrates that were the raw materials for making the grain that went into the cereal. And just for good measure, the process kicked back out a few oxygen molecules, maybe part of what you're breathing right now.

In the meantime, as you read the paper and eat your cereal, you are probably not thinking about how the entire process is being controlled by the many proteins that operate throughout your body. Those proteins are made of chemicals which happen to contain nitrogen. Remember that 80% of the atmosphere you just breathed? That's what proteins are made of.

By an elegant and complex process a particular group of bacteria take the atmospheric nitrogen and turn it into forms that can be used for biological purposes. The bacteria live in tiny nodules on the roots of plants known as legumes, "paying rent" by giving up some of the nitrogen to the plants.

Legumes—plants like alfalfa, clover and soybeans—are eaten by us, or are eaten by animals that are eaten by us, or their nitrogen compounds are incorporated into the soil and used by other plants. Ultimately, the nitrogen ends up in the proteins on which life is based.

These are just a few examples of how every living thing is dependent on natural processes, intimately linked to the Earth's biophysical systems. Many more such linkages are at work during your morning routine - the pollinating insects that make orange juice possible, the hydrologic cycles that put water in the coffee pot, the ozone that protects you when you walk out into the sunlight.

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The Economics of Ecology

Until recently, ecosystem services were assumed to be inexhaustible, indestructible, and— because they had no apparent costs —without value. Only as we have come to better understand their importance to us—and to understand the impact we have on them—does their value become apparent. These services are not only critical to the bare-bones survival of life, they are essential to the economic and technological functions that underlie modern civilization.

Or put another way, think how hard it would be to get to work in the morning without air and water! Between economics and ecology, an emerging new discipline called ecological economics is beginning to describe such services and attach a price tag to them.

So what are the services we're getting from the ecosystem? The following is partial list adapted from Hawken et. al. [1]:

It is unlikely that any amount of technological ingenuity could come up with replacements for these natural systems. As Hawken, Lovins and Lovins put it "Thus far, there are precious few if any substitutes..."

Temperature control is good example of how hard it would be to re-create these systems. Humans can only survive within a narrow range of warmth and cold. Without clothing or shelter, that range might be a few dozen degrees Fahrenheit. With those amenities, and with various "artificial" means —fans, down jackets etc.—we usually succeed in maintaining ourselves within an even more comfortable range of just a few degrees.

Yet, all of those warming and cooling devices (which are themselves based on a network of natural systems) are really only required to moderate a narrow range of temperature. The real work has already been done by solar energy and the insulating effect of the atmosphere.

Without the atmosphere regulating the climate, the Earth's year round temperature would average around zero degrees Fahrenheit. Under those circumstances, with no liquid water to be found, staying warm would actually not be our biggest problem. Down jackets wouldn't help much in any case.

Although nature might seem quite distant from the modern world, look far enough and you will find natural systems and substances at the foundation of all activities. Prof. Partha Dasgupta [2] of Cambridge says: "Whether it is consumption or production, or whether it is exchange, the commodities and services that are involved can be traced to constituents provided by Nature."

It is not always easy to grasp the immensity of these systems nor the role they play in our lives. Some, like the nitrogen cycle, are invisible to the casual observer; others, like climate control, are so complex that they are not fully understood even by experts.

Without market values for these services, however, economics has traditionally called them "externalities"—infinite in supply and hence valueless. Yet, as Hawken et al. note, whatever monetary value one may choose to assign them, "zero is surely the wrong answer."

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city and port
Free or Priceless? The invisible atmosphere is actually a swirl of biological, chemical and physical processes. Keeping them balanced is one of the most indispensable services that
the world — and human society receive from the ecosystem.

Setting the Prices

One of the most comprehensive attempts to calculate the value of ecosystem services appeared in the journal Nature [3] in 1997. Drawing from a number of previous studies, an international team headed by Robert Costanza of the Maryland Institute of Ecological Economics proposed a comprehensive figure that would cover the costs of 17 categories of ecosystem services.

Since life on Earth would be impossible without these services, Costanza's team acknowledges that ".in one sense their total value to the economy is infinite."

Still, they suggest that it is useful to study how changes in these services might affect humans. "These changes may dramatically alter terrestrial and aquatic ecosystems, having an impact on the benefits and costs of local human activities."

In other words, we have no way of putting a price on replacing these systems—they're irreplacable—but what would be the cost to society if the capacity of particular ecosystems changed or disappeared?

In some cases these costs can be calculated in concrete values. New York City, for example, recently learned it would cost $6 to 8 billion to construct water treatment facilities that would perform the same function as the natural woodlands on the city's watershed. By spending $1.5 billion, New York will be able to preserve the watershed forests and forego new construction. In this case, the value of the ecosystem service is obviously in the range of $4.5 to 6.5 billion.

Many other services, however, don't lend themselves to this sort of pricing. The article in Nature notes that a "...large part of the contributions to human welfare by ecosystem services are of a purely public goods nature." They mention services like soil formation and waste treatment. Like the nitrogen cycle, many of these services are invisible to people.

Aware or not, however, it seems certain that these systems can be damaged by people's actions. There is new urgency to understanding their economic importance. In particular, some writers believe that such accounting would show how costly it would be to compensate for the loss of services, compared to protecting them.

Such costs may be indirect or hidden—health problems from air pollution, flood damage from overburdened streams, fertilizer costs on depleted soils. Once again, though, when looking at the price, the right answer certainly isn't "zero."

Given that, Costanza's team made an (admittedly speculative) approximation of the potential value of such service categories as water quality, food production and climate regulation. The final figure worldwide was $33 trillion.

Clearly, this number—almost twice the total gross domestic product for the all the countries on Earth combined—is so large as to be unimaginable and, to many readers, meaningless.

Indeed, critics might call it ridiculous. Lacking the context of transactions and a market, there is no way most of these costs will ever be observed. Moreover, some critics contend that it is immoral to assign prices to qualities like human health or aesthetic pleasure. In their view, this sort of a cost-benefit analysis weakens moral arguments.

Costanza's team counters "...moral and economic arguments are certainly not mutually exclusive. Both discussions can and should go on in parallel."

In terms of the specific figure, they point out that their calculations were purposely conservative— making $33 trillion a low estimate—and that their work mirrors other earlier approximations derived from different methodologies.

Regardless of the precision of the estimates, the attempt to assign a specific dollar value to the ecosystem services may be a valuable step in redefining humanity's relationship with the natural world.

It allows us to see the ecosystem as an economic asset rather than always viewing environmental protection as an economic burden. Natural systems are not passive providers of goods or receivers of wastes, but become a dynamic set of actions in which we are all enmeshed.

In particular, businesses can gain a new perspective for judging their own environmental impact, and the role of the ecosystem in maintaining their operations. Like New York City and its water supply, businesses may discover that investing in ecosystems pays real dividends.

One place where these ideas are already being pursued is in the insurance industry.

Faced with both real and potential pay-outs for environmental disasters, insurers and reinsurers have recently begun to look at how degraded ecosystem services are affecting their bottom line. A press release [4] in February of this year from Munich Re, a large re-insurer, cited natural catastrophes—exacerbated by land use and severe weather—as "a major challenge to the insurance industry."

Some insurance carriers have begun to develop proactive environmental policies, even going so far as to lobby the US Congress for increased spending on global climate research.

As a senior executive of an American company [5] wrote: "One thing is clear: Insurers cannot afford to ignore the connection between global environmental changes and the impact on risk. Those companies that are satisfied with the status quo may be inviting an unpleasant financial surprise."

It is too soon to tell if this attitude will move into other businesses. Still, these first tentative steps linking economics and ecology have the potential to change how we look at both. Ultimately we may learn, in Dasgupta's words: "...nowhere is the environmental resource-base in unlimited supply. To treat the base as a free good is to practise bad economics."

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References

  1. Hawken, P., A. Lovins & H.Lovins. 1999. Natural Capitalism. NY: Little, Brown & Co. [go back]
  2. Dasgupta, P. 1996. "The Economics of the Environment." Proceedings of the British Academy. V.90, pp. 165-221. [go back]
  3. Costanza, R. , R. d'Arge, R. de Groot, S. Farber, M. Grasso, B. Hannon, K. Limburg., S.Naeem, R. O'Neill, J. Paruelo., R. Raskin, P. Sutton & M. van den Belt, 1997. "The value of the world's ecosystem services and natural capital." Nature V. 387 No. 6230, p. 253-60. [go back]
  4. Press Release, Munich Re, Feb. 29, 2000, www.munichre.com/ [go back]
  5. Gebhardt, K.. "When It Rains, It Floods - Severely." Best's Review, August 1997 [go back]

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Further Reading

  1. Daily, Gretchen C., 1997. Nature's Services: Societal Dependence on Natural Ecosystems. Wash. DC: Island Press.

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