Determining the Economic Risk/Return Parameters
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DETERMINING THE ECONOMIC RISK/RETURN PARAMETERS FOR DEVELOPING A MARKET FOR ECOSYSTEM GOODS AND SERVICES FOLLOWING THE RESTORATION OF NATURAL CAPITAL: A SYSTEM DYNAMICS APPROACH Volume 1: Main Report James Blignaut, Martin de Wit, Sue Milton, Karen Esler, David le Maitre, Steve Mitchell and Doug Crookes (Editors) Report to the Water Research Commission and the Working for Water Programme Department of Environmental Affairs WRC Report No. 1803/1/13 ISBN 978-1-4312-0435-9 JULY 2013 OBTAINABLE FROM Water Research Commission Private Bag X03 Gezina, 0031 [email protected] or download from www.wrc.org.za This report forms part of a series of two reports. The other report is Determining the economic risk/return parameters for developing a market for ecosystem goods and services following the restoration of natural capital: A system dynamics approach. Volume 2: Policy Briefs. (WRC Report no 1803/2/13) DISCLAIMER This report has been reviewed by the Water Research Commission (WRC) and approved for publication. Approval odes not signify that the contents necessarily reflect the views and policies of the WRC nor does mention of trade names or commercial products constitute endorsement or recommendation for use. © WATER RESEARCH COMMISSION ii Executive summary Project overview The degradation of ecosystems, mainly driven by human-induced land transformation, has reached unprecedented levels at a global scale and has been well documented (Wake and Vredenburg 2008; Estes et al. 2011; TEEB 2011). Various studies have indicated the unsustainability of the prevailing situation and the need for a rapid, sustained and large-scale intervention (sic. ecological restoration) to prevent the failure of ecological systems and the socio-economic loss of welfare associated with it (MA 2005; Halpern et al. 2008; Rockström et al. 2009, Bulchart et al. 2010; CBD 2010; LPR 2012). Most of the cost of this degradation, or the loss of natural capital, has been borne by the environment and society, for both the current and future generations, an outcome known in economics as externalisation. This has happened because there is no measure of the current cost or the benefit that ecological restoration would bring to society because there is no market to record these exchanges. South Africa has developed a proud history of addressing concerns about environmental degradation by means of restoration driven through the package of Natural Resource Management programmes – which have affectionately become known as the “Working for” projects. In addition to these restoration interventions, South Africa also has a series of national environmental policies and legislation (e.g. NWA, NEMA, CARA) that make provision for mandatory restoration projects, such as mining rehabilitation. None of these efforts, despite their obvious value and worthiness, effectively internalise the costs and the benefits of restoration activities. As symptomatic responses to an ongoing problem, they fail to change the economic drivers that generate the need for restoration. This happens largely because the cost of degradation and the need for, and value of, restoration are not explicitly considered. This study focused on developing an evidence base for the use of economic tools/instruments in the decision-making process about the restoration. We have neither investigated the need, nor the moral and/or intrinsic reasons, for restoration. We applied the conventional return/risk economic decision-making framework to eight existing restoration projects to evaluate whether such a decision- making framework could be applied to restoration over a range of environmental conditions and in different contexts. By making both the cost and the benefits of restoration explicit, we aimed to illustrate the potential for the development of markets for ecosystem goods and services (offered by restoration). Our underlying assumption was that by changing market signals, market participants will adjust their behaviour. Background Through the Natural Resource Management programmes – mainly Working for Water, Woodlands, Wetlands and Fire projects, and various other restoration projects such as the mandatory restoration and rehabilitation of road servitudes and mine-dumps, South Africa has established itself as a country which has started to invest in the restoration of natural capital (RNC). This is especially true among developing nations where South Africa is being used as an example and leader. However, despite this iii rich history of restoration, no meta-analysis (a high-level, cross-sectional analysis) has been done to assess restoration’s ecological, hydrological, and economic impacts across a range of contrasting sites and contexts. This study aimed to rectify this obvious deficiency. The specific objectives of this study were to conduct ecological, hydrological, and socio-economic assessments to determine the impact of restoration at eight existing ecologically and socio- economically different restoration sites by comparing them with degraded or un-restored areas in close proximity. The outputs from these studies were used to develop an integrated system dynamics model on the likely impact of restoration on the ecology, hydrology and economy of notably agriculture. This model was specifically focused on internalising the economic (societal) costs and benefits of restoration and to apply an economic decision-making rationale to the results in an effort to make the societal benefit of restoration explicit. Restoration impacts positively on flows of a suite of ecosystem goods and services and therefore, we suggest, on the economy. While some evidence exists of the ecological and hydrological implications of restoration for individual projects, the links between these restoration activities and the economy across various spatial scales and biomes have not been established. There is also no clear understanding of how the benefits before and after restoration might affect agriculture through improved returns from terrestrial ecosystems. These benefits generally are believed to be very real and significant but they are not well understood. This study endeavoured to provide these links. In effect, restoration is no different from the capital expenditure on any project and the return to the land. The value of environmental services emanating from the ensuing flows (as a result of the capital expenditure) is the annual stream of benefits delivered at an annual maintenance and operation cost. This is not unlike any other investment that does have an upfront capital component with regular/annual operational and managerial cost, but that yields an ongoing stream of benefits in the form of products or services being sold. Although South Africa has a proud history of RNC, a meta-analysis of the ecological, hydrological, and economic impacts of restoration across a range of contrasting sites and contexts is lacking. This study aimed to address this deficiency and to determine the tangible (societal) contributions of restoration in terms of economic parameters. We focus on existing restoration sites and monitor and evaluate the ecological, hydrological and socio-economic impacts restoration had at those different sites. We used a carefully selected set of ecological, hydrological and socio-economic parameters to test the following hypothesis at eight different sites: RNC improves water flow and water quality, land productivity, in some instances sequesters more carbon, and, in general, improves both the socio-economic value of the land in and the surroundings of the restoration site as well as the agricultural potential of the land. The distribution of the sites is shown in Figure a below, with a summary of the site characteristics provided in Table a. iv Figure a Geographical distribution of case studies Table a Description of restoration study/project sites Site Biomes Climatic MAP Ownership Size Extent of Zone (km2) Degradation 1 Succulent Arid 160 Private 26 Severely degraded: Restoration following Karoo open-pit surface mining 2 Nama Karoo Arid 239 Public/ 8 Degraded: Clearing of invasive alien Private plants 3 Succulent Arid 242 Private 1,762 Severely degraded: Restoration following Karoo overgrazing ostriches 4 Savanna Semi-Arid 400 Private 9,249 Degraded: Bush-thinning (and combating bush encroachment) 5 Fynbos Semi-Arid 478 Public/ 548 Degraded: Clearing of invasive alien Private plants 6 Fynbos Semi-Arid 650 Private 46 Degraded: Clearing of invasive alien plants in the riparian ecosystem 7 Grassland Temperate 900 Communal 1 Severely degraded: Restoration of a communal grassland system following overgrazing 8 Forest/ Temperate 1275 Public/ 32 Degraded: Removal of exotic plantation Savanna Private forestry MAP = Mean annual precipitation; size refers to the size of the study site from an economic perspective v Objectives The objectives of the study were: 1. To conduct ecological assessments to determine the impacts of restoration at eight ecologically and economically different sites in comparison to degraded or unrestored areas in close proximity to the selected sites. 2. To conduct hydrological assessments to determine the impacts of restoration at eight ecologically and socio-economically different restoration sites in comparison to degraded or unrestored areas in close proximity to the eight selected sites. 3. To conduct economic and socio-economic assessments to determine the impact of restoration at eight socio-ecologically and socio-economically different restoration sites in comparison to degraded or unrestored