Valuation of Coastal Ecosystem Services

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van den Belt M, Forgie V, and Farley J (2011) Valuation of Coastal Ecosystem Services. In: Wolanski E and McLusky DS (eds.) Treatise on Estuarine and Coastal Science, Vol 12, pp. 35–54. Waltham: Academic Press.

12.03 Valuation of Coastal Ecosystem Services M van den Belt, Ecological Economics Research New Zealand (EERNZ), Palmerston North, New Zealand; Massey University, Palmerston North, New Zealand V Forgie, Massey University, Palmerston North, New Zealand J Farley, University of Vermont, Burlington, VT, USA

12.03.1 Introduction 35 12.03.2 Valuation and Its Function in a Market System 36 12.03.2.1 Price versus Value 36 12.03.2.2 Why ESs Are Not Part of Market System 37 12.03.2.2.1 Nonexcludable resource regimes 38 12.03.2.2.2 Nonrival resources 38 12.03.2.2.3 Externalities 39 12.03.2.2.4 Uncertainty 40 12.03.3 Valuation Techniques to Use When People Perceive the Value of ESs 40 12.03.3.1 Theoretical Underpinning for Neoclassical Valuation Approach 40 12.03.3.2 Neoclassical Methods for Valuing ESs 42 12.03.3.2.1 Stated preference techniques 42 12.03.3.2.2 Revealed preferences techniques 43 12.03.3.2.3 Benefit transfer and rapid ES valuation assessment 44 12.03.3.3 Limitations of Neoclassical ES Valuation Techniques 45 12.03.4 When People Do Not Perceive the Benefits of ESs 46 12.03.4.1 Ecological Indicators 47 12.03.4.2 Participation and Stakeholder Involvement in Policymaking 47 12.03.4.3 Knowledge Integration 48 12.03.4.4 Multicriteria Analysis 49 12.03.4.5 Scenarios 49 12.03.4.6 Mapping and Modeling 50 12.03.4.7 Payments for ESs 50 12.03.4.7.1 Integrating ecosystem services into markets 50 12.03.4.7.2 Adapting institutions to ESs 51 12.03.5 Conclusion 51 References 52

Abstract

Valuation is about tradeoffs between alternative options, regardless of whether these tradeoffs are consciously made or not. Natural capital contributes substantially to societal and individual well-being by sustaining economies, generating life support functions and innumerable amenities, and assimilating waste. Societies that rely on the market system for resource allocation generally underestimate the contribution of natural capital to human welfare. Valuation exercises are about making these contributions more visible and thereby generate a better understanding of the way we assess, negotiate, measure, and use tradeoffs. Short-term, enduring, localized, individual tradeoffs are more easily perceived and estimated, and markets in many cases automatically calculate a monetary value or the market system can be simulated to provide a value. Tradeoffs and, therefore, valuation of more systemic ecosystem services, provided free by natural capital, require capturing long-term, risky and uncertain, global, and co-evolving community-oriented perceptions, and are much more difficult to make explicit. This chapter aims to cover a valuation continuum and first presents the approaches that fall in the realm of neoclassical economics valuation tools by providing examples of valuation from an ecological economics perspective.

12.03.1 Introduction world predominantly means fossil fuels, whose combustion emits waste into the environment. Removing ecosystem structure and Valuation of ecosystem goods and services (ESs) refers to the art emitting waste, above the assimilative capacity both degrade ESs, and science of making tradeoffs explicit. All economic production so there is an unavoidable tradeoff between economic production requires the transformation of raw materials provided by nature, and ESs. The question is not whether we should value ESs but which otherwise serve as the structural building blocks of ecosys- rather how we should value them so that decision making con tems. All economic production requires energy, which in today’s cerning these tradeoffs becomes more transparent.

35 Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy 36 Valuation of Coastal Ecosystem Services

When addressing how to value, the choice of cardinal or and suggest tools better suited to improve management deci ordinal valuation is important. Cardinal valuation assigns spe sions and evaluation of tradeoffs concerning critical ecosystem cific quantitative and proportional values: e.g., shrimp resources. We offer an expanded conception of tradeoffs, and aquaculture is 2.3 times more valuable than fish aquaculture acknowledge that ESs have ethical, spiritual, cultural, and bio per hectare. Ordinal valuation simply requires that we can state centric values that directly or indirectly support or enhance the that one thing is more or less valuable than another without welfare of humans and other species, some of which may be specifying precisely how much: e.g., a mangrove ecosystem is lexicographic. Giving such perspectives, a voice in tradeoff more valuable than the shrimp aquaculture ponds that replace evaluation and decision making can include them without it. The distinction between ordinal valuation and cardinal requiring cardinal valuation. valuation can become difficult, however, for some types of The chapter is divided into three sections. Section 12.03.2 decisions. If the price of shrimp or productivity of shrimp discusses the concept of value in the market system and why ES aquaculture doubles, is the mangrove ecosystem still more does not fit well in this framework. Section 12.03.3 focuses on valuable? What if it quadruples, or increases 10-fold? One valuation techniques designed to bring ESs into the market type of ordinal valuation is known as lexicographic valuation, framework in order to increase economic efficiency. Section which states that a unit of one thing is more valuable than any 12.03.4 focuses on tools and governance structures to achieve quantity of another. Perhaps no amount of money justifies a variety of different goals, including (but not limited to) destroying a mangrove forest essential to the survival of an ecological sustainability, social justice, and economic endangered species. Either way, valuation measures are only efficiency. meaningful within established boundaries, which can only be established by moral and ethical values; not by economics only. 12.03.2 Valuation and Its Function in a Market System There are many valid reasons why we should not place 12.03.2.1 Price versus Value cardinal (e.g., monetary) values on ecosystems and their ser vices (Sagoff, 1988; Heal 2000; Bockstael et al., 2000; Spash The goal of monetary valuation is to extend the benefits of the et al., 2005). Valuation is an anthropocentric approach that price mechanism to nonmarketed ESs. In order to evaluate disregards other species. Valuation may be a pointless exercise monetary valuation, we must first understand the benefits of when ecosystems are essential and nonsubstitutable; as the price mechanism and the distinction between price and humans cannot exist without them, their value approximates value. infinity. Placing a monetary value on ecosystems suggests that Most people assume that market prices measure value, money serves as a substitute. Moral values cannot be reduced to but fail to think about what specific values they measure. the monetary calculation of cost–benefit analysis (CBA). The Economists long ago recognized that prices do not necessarily complexities of ESs make any scientific estimates of their con measure the actual contributions of commodities to our welfare. tribution highly uncertain. Appropriate use of cardinal As Adam Smith (1776) pointed out, diamonds contribute little valuation demands that these concerns are recognized. to human welfare, but are very expensive, whereas water is However, there is no inherent reason that cardinal valuation essential to life but is generally quite cheap. Economists realized should neglect the interests of other species more so than other that the value of diamonds is determined more by their scarcity decision aids, and other species may suffer the greatest disad than by the benefits they provide, which led them to distinguish vantage in the absence of valuation. Furthermore, humans between value in use and value in exchange (or simply exchange cannot exist without food, but few argue against its monetary value). The value in use of something is the contribution of all valuation in the supermarket. units consumed to our welfare. The first units of water consumed Although we must recognize the limitations of cardinal have essentially infinite value, but water is very abundant, and as valuation, and prefer to use ordinal or lexicographic valuation more and more water is consumed, each additional unit is used when appropriate, we must also recognize that ignoring the for less and less important uses with lower and lower marginal explicit valuation and inclusion in decision making of ecosys value. The very last units consumed are often simply wasted, tems and their services is not an option in the face of rapid with a marginal value approaching zero. This is the concept of global changes and ecosystem degradation and loss. diminishing marginal utility. The value in use of diamonds is “Ecosystem management decisions inevitably involve trade never very high, but because diamonds are so scarce, we allocate offs across services and between time periods, and weighing them only toward their highest value uses, such as display status. those trade-offs requires valuation of some form” (Farber et al., The marginal value of a commodity determines its exchange 2006: 118). Any choice of one alternative over the other value, or market price: How much of one commodity does one involves a value statement as we are expressing a preference have to give up in exchange for another unit of another com “we cannot avoid the valuation issue because as long as we are modity? Neoclassical economists focus almost entirely on forced to make choices, we are doing valuation” (Costanza and marginal values, or prices, which should not be confused with Folke, 1997: 50). The issue is how to make complex choices the total value of a commodity. more explicit by engaging in adequate dialoging, utilizing the One central role of prices in a market economy is to balance broad and solid input of science data and information, as well supply with demand, marginal costs with marginal benefits, on as applying a process suited to reaching decisions and adapting both the production and consumption sides of the economy. to new information. Most decisions concerning resource allo On the production side, the allocative function of price appor cation and, hence, the current state of ES, are driven by market tions resources to whatever industry is willing to pay the most forces and narrow market-based assumptions. In this chapter, for them, generally the industry capable of adding the most we highlight the shortcomings of markets with regard to ESs monetary value to the resource, which maximizes monetary

Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy Valuation of Coastal Ecosystem Services 37 value of all factors of production. The rationing function of in-ground supply, reflecting only cheaper and more efficient price apportions commodities to whoever is willing to pay the extraction and distribution technology, but not the depletion most for them, thus maximizing monetary value across all of a finite resource. consumers. The price mechanism therefore maximizes the For renewable natural resources, for example, blue fin tuna, monetary value of both inputs and outputs. price increases are likely to promote more rapid extraction. Another function of prices is to signal scarcity and provide Although this increases market supply in the short run, it incentives for alleviating it. When demand for a resource diminishes the capacity of the resource to reproduce, decreasing increases or supply decreases, people want to buy more of the the supply in the long run, and decreasing the provision of ESs resource at the existing price than is available. Some people will that the fished-out species contributes to. If prices increase more be willing to pay more than the existing price, and will bid the rapidly than extraction costs, or if technologies are dedicated to price up. A higher price leads consumers to demand less or more cost-effective harvesting and extraction rather than to the consume a substitute and producers to supply more or to create development of substitutes, we run the serious risk of exhausting substitutes. A producer will increase supply as long as consumers critical resources before we develop substitutes for the resources are willing to pay the cost of producing another unit, which themselves or for the services they provide, many of which are means in equilibrium the price of a good is equal to the marginal likely to prove nonsubstitutable. Valuing ESs can help make us cost of production and the marginal benefit from consumption. aware of the benefits they provide, and thus stimulate appro At the margin, a producer earns the full cost of production, and priate governance and management institutions that reduce the the consumer pays the minimum price that will bring the pro risk of destroying them. duct to market. When supply exceeds demand at a given price, suppliers will lower their prices or reduce production until the 12.03.2.2 Why ESs Are Not Part of Market System market again clears, ensuring no waste. In theory, prices do this for all market goods simultaneously, using only the free choice Economics is generally defined as the allocation of scarce and decentralized knowledge of consumers and producers. resources among alternative competing ends. Goods and ser The question is whether the best allocation of resources is vices flowing from ES in an empty world (Daly, 2005) were one that maximizes monetary value or redefine the notion of abundant, not scarce, and hence not important or relevant to ‘utility’ from the individual to the level of ecosystems. Take the economic decisions. Although there are examples of cultures example of a mangrove ecosystem. Intact, the mangroves pro that have exceeded their environmental limits and disappeared tect a neighboring poor community from tsunamis and storm (Diamond, 2004), new frontier lands (such as the Americas surges. The ecosystems serve as a nursery for numerous fish and Australia) and fossil fuels have provided escapes from the species and filter pollution and sediment from terrestrial runoff full impact of overshoot in more recent times. Now that we that would otherwise degrade offshore reefs and destroy fish have entered the realm of the full world, new environmental habitat. Poor regional fishermen depend on these fisheries for issues are increasing in number and scientific research identifies the livelihood. The mangrove also provides firewood, building problems previously not seen as significant (see Chapter 12.01 materials, medicinal plants, and other benefits, while playing a in this volume). ESs have become scarcer. As a result of global significant role in climate regulation. The alternative allocation population growth and materialism, demands on ES have of the ecosystem is to clear-cut the forest and create dikes and changed in scale. They have grown, for example, from pollu ponds for shrimp aquaculture (Farley et al., 2010). The mar tion of local waterways to dead zones in the oceans and seas, ginal monetary value of these competing benefits is determined and poor local air quality to a buildup of greenhouse gases and by how much consumers are willing to pay for them, including chlorofluoro carbons (CFCs) in the atmosphere, interfering all the non-marketed benefits. In the example provided, con with the global climate system and ozone layer. sumers in the wealthy nations are willing to pay a high price for It is the scale of the loss and degradation of ES that has led nice shrimp, whereas impoverished villagers have very little to a desire to put a value on assets which bring indirect use ability to pay for the ESs they receive. The allocation function benefits, options and bequest benefits, or simply existence of price will therefore apportion the resources of the mangrove benefits attributes that do not translate well into a present- ecosystem toward shrimp aquaculture rather than sustaining day monetary value. Placing an accurate value even on market the life-supporting ESs. The rationing function of price ensures goods is difficult, which is why financial investors engage in that the shrimp themselves will go to overfed but wealthy speculation and hedging. Nonmarket values are even more consumers in rich nations, rather than malnourished but impo difficult to estimate but placing an economic value on ecosys verished local villagers. The basic issue is that market demand is tem goods and services may help reveal otherwise hidden social determined by preferences weighted by purchasing power. costs and benefits (Wilson and Liu, 2008). As ESs are not When we use the price mechanism to decide how to allocate normally provided through the market, they are not priced our shared natural inheritance, we are basing our decisions on and therefore have a zero implicit price. As a result, many the principle of one dollar, one vote. The price mechanism economists fail to recognize that natural capital is required efficiently maximizes present monetary value but lacks a mea for economic production (Dasgupta, 2008), and that the mar sure of distributive fairness. More democratic allocative ginal value of ESs is likely to be increasing rapidly as they mechanisms might favor the needs of the poor majority over become scarcer. For example, Bateman et al. (2002) suggested the wants of the wealthy minority. that even if ESs were market goods, their price would be very Another question is whether or not prices effectively signal low despite their importance in sustaining human life, because scarcity and stimulate greater production and innovation in they are so abundant. However, an increasing number of scien response. Oil prices were on a steady downward trend from tists believe that the growing scarcity of ESs now poses a serious 1872 to 1972, in spite of growing demand and decreasing threat to human welfare and even survival (Beddoe et al., 2009;

Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy 38 Valuation of Coastal Ecosystem Services

Catton, 1982; Wackernagel et al., 2002; Millennium Ecosystem is the sum of marginal values across all beneficiaries. Assessment, 2005; Rockstrom et al., 2009), in which case their Unfortunately, markets not only fail to calculate this value, marginal value is increasing exponentially. but also systematically reduce it. There are a number of characteristics associated with ES that This failure of markets with nonrival resources is perhaps prevent markets from accurately signaling or maximizing their best explained through an example. Cone shells, a tropical value. We focus here on nonexcludability, nonrivalry, external mollusk, produce a variety of potent neurotoxins, many of ities and uncertainity. which have considerable pharmaceutical potential. Some even hold the promise of potent, nonaddictive painkillers. 12.03.2.2.1 Nonexcludable resource regimes Many of these can be synthesized (Becker and Terlau, 2008), Markets are possible only when resources are excludable, which and if access to this knowledge is unrestricted it is inherently a is to say that someone can be prevented from using them. If nonrival public good. Although it is a free good, the benefits to people cannot be prevented from using a resource, they are different individuals can be depicted by the hypothetical unlikely to pay for its use and the market will fail to produce or demand curve for the knowledge in Figure 1. Some people preserve appropriate amounts. In such case, a free rider (who suffer extreme pain) value it a lot (and would be willing problem exists (Wills, 1997). Although some elements of to pay a price of 7 units), others who do not suffer pain (or are ecosystem structure, such as timber, fish, and land, are exclud unable to pay) place little value on the knowledge. able, many of the most important ESs generated by that The marginal benefit or demand curve for a nonrival structure are inherently not excludable, particularly supporting, resource can be depicted by a downward sloping line. The regulating, and cultural services. Consider, for instance, the total value to society of the knowledge of how to extract pain difficulty in limiting the experience of the aesthetic values of a killers from cone shells must be summed across all potential coastline, or limiting access to the ocean’s capacity to assimilate beneficiaries and is given by the area under the demand curve, waste. It would be essentially impossible to create exclusive which gives a consumer surplus of 63 units. As the information private property rights to services such as climate stability, is freely available, the cost of learning which neurotoxins have protection from ultraviolet (UV) radiation, and disturbance pharmaceutical properties and how to synthesize them is the regulation. same if one person or one million use the knowledge. The marginal cost of an additional user of the knowledge is there 12.03.2.2.2 Nonrival resources fore zero, so the supply curve lies directly over the x-axis. In Many ESs are nonrival in nature, which means that one Figure 1 economic surplus is maximized at 18 beneficiaries person’s use does not preclude enjoyment by others. when marginal cost = marginal benefit = 0. Nonrival resources are not scarce in the economic sense, However, if the knowledge of how to extract painkillers since no matter how much they are used, just as much from cone shells is sold (private property rights allow a charge remains for others to use. For example, if one benefits from for use), price will ration consumption to only those whose the ozone layer protecting him/her from skin cancer, or a marginal benefit exceeds the price. Those whose benefit does mangrove forest protecting his/her home from tsunamis, it not exceed the price will be excluded from use, reducing the leaves no less protection for another. Its value to society must value of the knowledge, as shown in Figure 2, where at the therefore reflect the benefits that both of us receive. For a price of 3.5 per unit, the number of beneficiaries halves to nine. rival resource, that is, one that is depleted by consumption, The maximum profit is 31.5 units (3.5 � 9), and maximum the value to society is determined by the greatest amount any economic surplus of 63 units is reduced to 46.5 units. There individual is willing to pay for it, as only one person can is a dead-weight loss of economic surplus of 15.5 units. If the benefit from its consumption. Markets provide this informa cost of developing the pharmaceutical is 32 units, the market tion. However, as so many people can benefit from the use of will not provide it at all, depriving society of 31 units of a nonrival resource, the value to society of the marginal unit economic surplus. The value of nonrival resources is

Marginal value Economic surplus 2

0 0 2 4 6 8 10 12 14 16 18 20 Number of beneficiaries Figure 1 Demand for nonrival resource.

Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy Valuation of Coastal Ecosystem Services 39

alue 5

3 Marginal v

2 Profit Dead-weight loss 1 of economic surplus 0 0 2 4 6 8 10 12 14 16 18 20 Number of beneficiaries Figure 2 Demand for nonrival resource with price rationing.

paradoxically maximized at a price of zero, when the marginal However, many market economists claim that most nonrival cost of an additional user equals the marginal benefit, but at resources are congestible, which means they become rival at that price the market will not produce it. high levels of use, and should therefore be rationed via the In summary, the marginal value of nonrival resources must price mechanism as well. From this perspective, rivalry can be be summed across all consumers. Markets cannot do this. If affected by policy. In our opinion, these economists are confus nonrival resources are excludable, it is possible to charge a ing nonrivalry with abundance. The so-called nonrival but market price, but price rationing actually reduces the resource’s congestible resources such as beaches or roads are in fact rival – value to society by creating a dead-weight loss of economic when one places his/her towel on a beach, that spot is no longer surplus. If nonrival resources are nonexcludable, which rules available for another towel. As long as there are abundant spaces, out exclusive property rights and market deals, market coordi one’s use does not leave less for another, but when space nation of production and consumption of that good is becomes scarce, it does. It can be efficient to ration scarce practically impossible (Wills, 1997). The value of rival goods resources with the price mechanism, but not nonrival ones. in contrast is the highest price that a single individual is willing Table 1 provides a matrix and illustrates with some examples of to pay. Markets can provide this information. Value maximiz rivalry and excludability of coastal ecosystem goods and services. ing production or conservation of nonrival coastal ESs requires multilateral coordination between producers and consumers 12.03.2.2.3 Externalities and free, open access use. An externality occurs when an economic activity has an impact It is important to recognize that nonrivalry is a physical (a cost or a benefit) on others not involved in the activity, and characteristic of a resource that cannot be affected by policy. no compensation occurs. Externalities can be positive or

Table 1 Matrix summarizes these results, and provides examples from coastal ecosystems

Excludable Nonexcludable

Rival and Finance: potential private sector Finance: public sector payments for restoration or protection, or else scarce Consumption: rationing required, price rationing suitable public sector regulation or creation of property rights, which can create Examples: tradable permits for waste absorption capacity incentives for private sector funding. or fish harvests, user fees for coastal zone recreation. Consumption: rationing required, price rationing suitable Examples: public payments for increasing production services (e.g., marine protected areas or ecosystem restoration); regulations that provide property rights to fisheries and waste absorption capacity. Nonrival Finance: potential private sector in presence of Finance: public sector government enforced intellectual property rights. Consumption: rationing impossible without new institutions or Consumption: rationing inefficient. Should be open regulations. Open access exists and is desirable. access. Examples: restoration of ecosystems to provide many regulatory Examples: property rights to genetic information; patents services (disturbance regulation, erosion control, climate on technologies that protect and restore ecosystem regulation, etc.), supporting services (habitat for biodiversity) and services. cultural services (scenic beauty, spiritual values, etc.); publicly available technologies that protect and restore ecosystem services.

Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy 40 Valuation of Coastal Ecosystem Services negative. From the laws of physics we know that it is impos inherently unpredictable. If we wipe out critical ecosystem sible to create something from nothing. Economic production functions, will we develop new technologies that replace requires the physical transformation of resources provided by them? Major technological change is also impossible to nature. Many of these resources alternatively serve as the struc predict (Faber et al., 1998). Even the best-informed scien tural building blocks of ecosystems that generate important tists struggle to understand how ecosystems generate ESs, ecosystem services at the local, regional, and global level, how they are affected by economic activities, and even the which are degraded or lost when the resources are converted exact services they generate. Frequently, we only learn about to economic products. Furthermore, energy is required to do these when the capacity to generate the service has been work, work is required for economic production, and the major seriously degraded or destroyed (Vatn and Bromley, 1994; source of energy is fossil fuels. It is impossible to create some Farley, 2008). thing from nothing, and the burning of fossil fuels creates pollutants that further degrade ESs. By consuming natural resources and energy, essentially all economic activities involve 12.03.3 Valuation Techniques to Use When People externalities. Nonconsumptive activities such as hydroelectri Perceive the Value of ESs city generation also have impacts (both positive and negative) on ESs such as recreation, habitat provision, and eutrophica Where people are aware of the existence of ES and the activities tion from reduced water flows and temperature increase. In that affect them (therefore, the ESs are characterized by risk other words, the full costs of economic activity may not be rather than uncertainty or ignorance), a number of neoclassical revealed or fully taken into account in producer or consumer approaches have been developed for valuing environmental decisions, resulting in less-than-optimal outcomes for society. goods or nonmarket goods in general (Mitchell and Carson, It is important to recognize that the problem of external 1989; Garrod and Willis, 1999; Bateman et al., 2002; Ward, ities is closely related to the problem of excludability. 2006). Marginal analysis of values of ES based on human Externalities affect benefits over which no one has explicit preferences is possible where substitution and tradeoffs allow property rights. If no one has any property rights to clean air, individuals to make marginal choices; that is, the margins of then coal-fired power plants are free to spew pollutants into choice are not at the frontier of basic species and cultural the air, with negative impacts on individuals and other eco survival (Limburg et al., 2002). nomic activities such as agriculture. It is impossible to assign Neoclassical valuation methods attempt to estimate the private property rights to clean air and many other ESs, but economic value of an ecosystem or ecosystem component by it is possible to impose liability rules or inalienability rules summing the use value (direct and indirect) and nonuse or (Bromley, 1991). A liability rule allows one person to passive value (Pearce et al., 1989; Pearce and Turner, 1990; impose costs on another, but requires compensation. One Perrings 1995a, 1995b). example is a tax on pollution. An inalienability rule gives Generally, direct value is measured by the System of someone an irrevocable right to something which cannot be National Accounts (SNA) as it involves commodities traded bought, sold, or taken away. Society could, for example, on commercial markets. Indirect value is the value derived create inalienable rights to a stable climate, which would from ecosystem goods and services which support or protect essentially forbid greenhouse gas pollutants above a certain direct-use activities. Nonuse value is related to the passive use level. One example is a strict cap on carbon emissions at a of ecosystems and their services where people derive value not level below the capacity of terrestrial and marine ecosystems from the exploitation of nature but from its existence (Krutilla, to absorb carbon dioxide (Daly and Farley, 2004). 1967). For a more detailed discussion of economic concepts of value, see Farber et al. (2002). 12.03.2.2.4 Uncertainty This section begins with an overview of the theoretical Uncertainty exists when possible outcomes of an activity are underpinnings to the neoclassical methods for ES valuation. known but not the probabilities (Knight, 1921). Uncertainty is It then briefly describes some of the better-known methods different from risk where both the outcomes of an activity and divided into two main groups: (1) indirect or stated prefer the probability of those outcomes are known and this informa ence methods and (2) direct or revealed preference methods. tion allows economists to convert risk into a certainty Lastly, limitations associated with neoclassical valuations of equivalent. This is done by multiplying the probability of an ES are set out. outcome by its value. For example, if a shrimp aquaculture pond has a 15% chance of being smitten by a serious virus 12.03.3.1 Theoretical Underpinning for Neoclassical and earning no profits, and an 85% chance of earning $10 000 Valuation Approach in profits, the certainty equivalent or expected profit is $8500. By definition, uncertainty cannot be converted into certainty The standard neoclassical valuation approach is based on mar equivalents, and there are no clear methods of incorporating it ginal analysis of how change in the quantity or quality of ESs into quantitative value estimates. We may know the possible affects human utility (Mitchell and Carson, 1984). Despite the outcomes from a cyclone striking a coast denuded of man apparent mathematical formalism of the neoclassical valuation groves, but not the probabilities of each outcome. Climate tasks, the process of monetary evaluation is itself a normative change impacts may make it impossible to even estimate the exercise. probabilities of hurricane strikes. Under perfect competition, the market price of a good or Ignorance exists when not even the possible outcomes of service is determined by supply and demand. Individuals are an activity are known. If we seriously degrade coastal eco regarded as insatiable rational utility maximizers who take into systems, how will they adapt over time? Evolution is account the benefits, costs, and risks associated with their

Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy Valuation of Coastal Ecosystem Services 41 actions. Consumers derive utility from consumption, and pro Neoclassical valuation methodologies have been developed ducers from profits. Driven by the individual pursuit of self- to allow the environment to be included in a CBA framework interest, markets allocate resources efficiently by bringing sup or to be integrated into market prices. A change in the quantity ply and demand into equilibrium. Strictly speaking, economic or quality of the habitat is estimated in terms of its effect on efficiency, also termed Pareto optimality, is defined as an allo human welfare and classified in terms of direct, indirect, and cation of resources such that no further reallocation is possible passive value. The sum of indirect and passive use values can be that would provide gains in production or consumer satisfac large compared to the direct use value of nonmarket goods tion to some firms or individuals without simultaneously (Spash et al., 2005). As the quality (or quantity) of ES changes, imposing losses on others. Inherent in the concept are a num the change in marginal benefits is measured by the demand ber of assumptions, including (Wills, 1997; Young, 2005): curve. Valuation techniques attempt to quantify direct, indirect, and passive use values in monetary terms by estimating the 1. individual preferences count, or, in other words, what the demand curve or a point on the demand curve for the resource individual wants is assumed good for the individual; or ES. A point on the demand curve is appropriate for a mar 2. the economic welfare of society is based on the economic ginal change, whereas the area under a demand curve between welfare in aggregate of its individual citizens; and two points is appropriate for a larger change. Figure 3 schema 3. a change that makes everyone better off with no person tically represents the demand curve for a substitutable, rival ES worse off constitutes a positive change in total welfare. or commodity. A vertical line indicates current supply, which does not respond to market price signals. The goal of ES valuation is to include values for these non- For a substitutable and rival ES or good, the marginal value market goods and services in economic decisions, either by at current quantity Q1 is given by MV1, which represents the using the tool of CBA, or else by integrating ES values into maximum amount a single beneficiary would be willing to pay. market prices. It is possible to integrate this value into market prices by as, for Integrating ES values into market prices, via for example, example, a tax on activities that degrade the service. In theory, if taxes on ES degradation or subsidies for ES provision, in the provision of the service fell to Q2, the tax would have to theory, leads to Pareto optimal resource allocation. CBA increase to MV2. CBA, in contrast, would compare two alter instead seeks to explicitly compare at least two distinct states native states, for example, one that generates Q1 of the service with different levels of ESs and with different levels of the with a marginal value of MV1 and another that generates Q2 activities that affect them. In reality, few policy changes or with a marginal value of MV2. The loss in economic surplus resource management practices would meet the strict Paretian from the ES in state Q2 is given by the area aQ2Q1b, and counts standard of improving the welfare of many while making no as a cost in a CBA. However, given the difficulties of estimating person worse off. To overcome this difficulty, welfare theorists two points on a demand curve for a nonmarket ES, many apply the compensation test. Here, if beneficiaries could in economic studies assume that the marginal cost remains con principle compensate losers and still be better off, the change stant, and estimate the loss in economic surplus as area is deemed acceptable, whether or not the compensation actu cQ1Q2b. ally takes place (Young, 2005). In relation to the Paretian Most ESs are essential, nonrival, and nonsubstitutable standard, it should also be noted that applied CBA typically and are frequently subject to ecological thresholds beyond examines fairly large increments of change and assesses sim which, the ecosystems that provide them are no longer ply whether the movement is in the direction of Pareto capable of regeneration. Therefore, Costanza et al. (1997) improvement. Where an action generates incremental benefits suggest that the demand curves are more like those repre in excess of costs, it is termed Pareto superior as it is superior sented in Figure 4. Each point on the demand curve in this to the existing situation (Young, 2005). case represents the sum of marginal benefits for all

Supply Marginal value a MV2

MV1 c b Demand

Q 2 Quantity Q 1 Figure 3 Estimation of the consumers’ surplus for a substitutable and rival ecosystem service.

Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy 42 Valuation of Coastal Ecosystem Services

Critical: Scarce: Abundant: invaluable inelastic demand, enough for all large increases in desired uses value with small changes in quantity

Demand curve for critical Marginal value natural capital

Critical natural capital stocks Figure 4 Estimation of the consumers’ surplus for an essential, nonrival, and nonsubstitutable ecosystem service. beneficiaries. For important ES the demand curve moves 12.03.3.2 Neoclassical Methods for Valuing ESs toward vertical as we reach the minimum supply necessary Neoclassical methods that can be classed as stated preference to meet human needs for survival (an economic threshold) methods include contingent valuation, conjoint analysis, or the minimum supply required for the service to regener choice experiments, choice ranking, and contingent rating. ate or avoid destructive positive feedback loops such as Stated preference methods simulate market conditions using runaway climate change (ecological thresholds). Below this questionnaires and hypothetical scenarios and can be used to level of consumption, the ESs are priceless and their value measure the value of any environmental resource without approaches infinity. For example, phytoplankton play a need for observable behavior (data). The supply side is critical role in the ES of oxygen regulation. At current con represented by the interviewer who offers to provide a cer centrations of about 21%, there is enough atmospheric tain amount of goods and services at a given price and the oxygen for virtually all desired uses, and the marginal respondent creates the demand with a willingness to accept value of oxygen production is essentially zero. If degrada or reject the offer. Revealed preference methods such as tion of marine ecosystems leads to lower oxygen travel cost, hedonic pricing, and avertive behaviors create concentrations, the marginal value becomes positive when demand and supply data from actual, observable market- we lose the ability to work strenuously (<19%), increases based information, reflecting individual purchases which is precipitously as coordination, judgment, and perceptions linked to the ES being valued, for example, for the purpose are impaired (<15%), and approaches infinity as we near of coastal recreation (see Chapter 12.11). 10%, which is the threshold for consciousness. This can be considered an absolute economic threshold – the minimum needed by humans. Quite possibly, however, marine eco 12.03.3.2.1 Stated preference techniques systems would first confront an ecological threshold, in The contingent valuation method (CVM) was the most fre which falling oxygen levels would reduce the fecundity of quently applied stated preference method. CVM works best marine phytoplankton, leading to a positive feedback loop when the good or service is close to a marketed good or culminating in the irreversible damage to oxygen regulation service. Participants reported values are contingent upon the services. Marginal values and hence economic surplus conditions of the situation created by the researcher and would approach infinity as we near this threshold. In elicited from individual respondents using carefully today’s world, very few ESs are so sufficiently abundant designed and administered sample surveys (Mitchell and that they have a zero marginal value; most are either in Carson, 1989; Arrow et al., 1993; Hanemann, 1994; the scarce or in the critical category with values ranging Venkatachalam, 2004). A range of hypothetical scenarios from very valuable to invaluable. are constructed by the researcher, and survey respondents Some valuation studies use the same method as gross are then asked to state their preferences. This simulates a national product (GNP) and estimate total value (i.e., eco market situationinwhich therespondent’s behavior is nomic surplus) as the product of marginal value and price observed. A willingness to pay/accept (WTP/WTA) question (Costanza et al., 1997). This is of course a gross under is then posed within the survey setting asking respondents estimate, and has the paradoxical characteristic for essential to state their maximum/minimum WTP/WTA for the given services that it increases as the supply of the service change in the quantity or quality of the environmental decreases (Farley, 2008). good, service, or resource. The mean bids from the sample The neoclassical valuation approach considers ecosystems are extrapolated across the population to obtain and ES uses only in terms of meeting human consumptive and the environmental value (Mitchell and Carson, 1989). The nonconsumptive needs (i.e., the economic threshold). The con popularity of CVM and other stated preference methods is cept of economic value is therefore instrumental and attributed to being able to consider nonuse values of a anthropocentric (Bateman et al., 2002). Furthermore, most resource and accommodate environmental changes that valuation exercises focus only on value to the current generation. have not yet occurred (i.e., ex ante valuation). Hypothetical

Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy Valuation of Coastal Ecosystem Services 43 policy scenarios or environmental situations outside the estimate specific attributes of a resource rather than just the current or past institutional arrangements or levels of provi resource as a whole. sion can be explored and public discussion enriched as a result of the information provided as part of the process (see 12.03.3.2.2 Revealed preferences techniques Chapter 12.11). The revealed preference techniques provide a mechanism Despite its frequent use, there are a number of criticisms whereby values for environmental goods can be revealed indir directed at CVM (Kahneman and Knetsch, 1992; Birol et al., ectly when an individual purchases a market good to which the 2006). These include the validity and reliability of the numbers environmental good is related in some way. Although the generated, especially for the nonuse values, when the method service in question is not itself traded, it can be linked in does not require actual payments; the scope for introducing some way to goods and services that are traded and have errors (i.e., incentives to misrepresent values, implied value market prices. The techniques included in this group are the cues, and scenario misrepresentation); being subject to various travel cost method (TCM), hedonic pricing, alternative cost biases, such as interviewing bias, starting-point bias, nonre method (ACM), damage cost method (DCM), and avertive sponse bias, strategic bias (free riding), yea-saying, scope and expenditures method (AEM). embedding effects, payment vehicle bias, and information bias; Revealed preference techniques can only estimate the value and poor replicability, thus failing to meet the basic standard of a resource in situ or on site. They do not measure nonuse or for science. passive values. Whether WTP or WTA compensation is the correct measure The TCM, one of the oldest nonmarket valuation techniques, to use depends on the property rights to the good (Carson, is predominantly used to put an economic value on recreational 2000). Although theoretically the difference between the two sites using the travel costs of visiting these sites as a proxy (Seller measures should be small, empirical studies show all other et al., 1985; Smith et al., 1986; Bockstael et al., 1991). facts accounted for WTA estimates are usually higher than This method is based on actual behavior and choices and is WTP (Kahneman et al., 1990; Hanemann, 1991). An explana relatively inexpensive to carry out. As most recreational sites tion for this is that people are loss adverse, and view the have zero (or nominal) entry fees (Smith et al., 1986) the cost possible loss of a good or service already held more negatively (associated with the trip) incurred in the private goods and than an equivalent possible gain of the same goods and services services market is used to infer the per-trip value (WTP) for (Kahneman and Tversky, 1979) along with many other beha the site visited. The rational is that an individual undertakes a vioral economists. visit to a recreational site if the recreational benefits or utility Other stated preference techniques include the choice from such a visit is at least equal to the cost of the visit to that experiment methods (CEMs), conjoint analysis, and choice site, that is, marginal benefit is at least equal to marginal cost analysis. Conjoint analysis involves respondents rating or rank (Ndebele, 2009). The visit to the site is treated as a single ing each of the treatment combinations consisting of different transaction and travel cost as the price for that transaction levels of different attributes and predetermined price levels (Wilson and Carpenter, 1999). The valuation determined (Hanley et al., 2001), while choice analysis involves respon using various economic and statistical models is based on the dents making specific choices between alternatives with derivation of a demand curve for the site in question based on different levels of the same attributes or with different attri travel costs and number of trips. This method can be used to butes (Hensher et al., 2005). estimate the economic benefits and costs resulting from The primary difference between CEM and CVM is that the changes in access cost for a recreational site, elimination of an former involves tradeoff among choices, whereas in the latter existing recreational site, addition of a new recreational site, respondents express their WTP based on a proposed environ and changes in the environmental quality of a site (Birol et al., mental change (see Chapter 12.11). A choice experiment 2006). Limitations associated with TCM include difficulty utilizes carefully designed tasks or alternatives to reveal factors defining and measuring opportunity cost of travel time, sample that influence choice (Birol et al., 2006). A profile or a number selection, and the fact that analysis is limited to the assessment of profiles are created for an environmental resource based of an existing situation (Kahneman and Knetsch, 1992; Birol upon its attributes. For example, coastal waters can be et al., 2006). described in terms of bathing water quality. This attribute There are a number of variants of the travel cost model: (1) could be split into levels of high, medium, and low and the individual travel cost demand model, (2) the zonal travel assigned monetary values. The respondent is then presented cost method, (3) the hedonic travel cost method, and (4) the with choices or a multitude of scenarios to establish tradeoffs random utility model. and WTP (Birol et al., 2006). The hedonic pricing method (HPM) is “based on the Factors that favor choice experiment as a method for hedonic hypothesis that goods are valued for their utility- valuation include marginal values of goods and services bearing attributes or characteristics” (Rosen, 1974:34) and are easier to measure, respondents are more familiar with consumers view commodities as bundles of attributes which choices than the CVM payment approach, it is more infor they take into account in determining the price they are mative as it offers individuals multiple choices, and it willing to pay (Lancaster, 1966). The HPM relies on the reduces response problems and some biases associated market prices of one good, usually real estate, to estimate with CVM such as strategic bias, yea-saying, and embedded the value of a nonmarket amenity that influences the price effects (Louviere et al., 2000; Bateman et al., 2003; Birol of the market good (Colby, 1989). For example, an esti et al., 2006). CEM has advantages similar to CVM as it can mate of the value of a coastal view can be determined by be used for any environmental resource and to estimate studying the relation between similar houses in the same nonuse values with the additional benefit of being able to location with and without a coastal view. Statistical data,

Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy 44 Valuation of Coastal Ecosystem Services often readily available from official sources, are used to water could have additional taste benefits, or additional waste estimate the implicit price or hedonic price of the indivi disposal costs); avertive decisions do not usually fall on a dual attributes by regressing the observed prices of continuous spectrum (e.g., whether or not to buy a water filter differentiated goods against the attributes of the good is a discrete decision); and avertive expenditures cannot gener (Rosen, 1974; Wilson and Carpenter, 1999). Because the ally include all the costs related to pollution so can provide HPM is based on observable and readily available data, it only a lower bound estimate of the cost of a damaged environ avoids many of the criticisms associated with stated prefer mental asset (Birol et al., 2006). ence methods. As most goods incorporate many attributes Combined stated preference and revealed preference meth and the relationship is complex, it can be difficult to isolate ods unite the desirable features of both, that is, to base the environmental-quality factors from market prices. valuation on actual behavior as in revealed preference models The ACM is based on the assumption that the maximum and to extend the investigation beyond the current observed WTP for a provision of a good or service is no greater than the state (Hanley et al., 2003). Methods such as contingent beha estimated replacement cost of providing that good or service vior models combine the observation of the current behavior via some other process or technology. The ACM is suitable for (e.g., current number of trips to a beach) with behavior that use only when it is possible to replace or replicate an ES with would occur in a contingent market (e.g., the number of artificial or man-made substitutes for the service in question, intended trips to the beach if the water quality was suitable such as storm protection or waste absorption. As ecosystems for swimming at all times). Stated preference and revealed generally generate numerous services at the same time, it is preference methods have also been combined with deliberative difficult to isolate and value a single component. For example, practices (see Section 12.03.4) to improve validity (Spash et al. the cost of erecting concrete barriers or building sewage plants 2005). as a replacement cost for a mangrove ecosystem considers only two of many services provided by the mangrove ecosystem. 12.03.3.2.3 Benefit transfer and rapid ES valuation This is a criticism that applies to the measurement of any single assessment ES. The cost of replacing the lost ES can be an indicator of value As all the previous valuation methods discussed are time in terms of expenditure saved though it is possible that the consuming and expensive to complete, evaluation techniques replacement cost may be worth more than the service itself, in that rely on existing knowledge rather than empirical research which case it is an overestimate of their monetary value. In the to inform decisions are gaining acceptance (Brouwer et al., situation where the mangrove ecosystem in question protects a 2003). Benefit transfer is an economic valuation tool that poor Bangladeshi community from storm surges, the cost of uses existing nonmarket valuation studies from other areas – concrete barriers is likely to be much greater than their WTP for the ‘study site’–and applies them to the area of interest – the storm protection. ‘policy site’–instead of carrying out empirical studies The DCM measures the increased costs imposed on indi (Bateman et al., 2000; Bateman et al., 2002; Champ et al., viduals or households as a result of an ecological change. 2003; Freeman, 2003, Alves et al., 2009). Value transfer and The general principle is that the affected individual or house function transfer are the two main types of benefit transfer. hold would be willing to pay up to the amount of the Value transfers can be a single-point estimate transfer, an expected damage in order to avoid them. The cost-of-illness average value (or measure of central tendency) transfer, or method is similar to the DCM. It uses data on damage to an agreed-on estimate transfer. Function transfers can be either human health such as the costs of medication, visits to a demand function transfer or a meta-analysis regression ben doctors, and time lost from work to infer the cost of envir efit function transfer. onmental damage. It does not, however, account for the Benefit transfer takes information from, for example, a disutility of those who are ill, nor does it consider the valuation study of coastal estuaries in the USA and uses it avertive or defensive measures taken by individuals to pre to generate value estimates for a similar wetland in New vent illness (CGER, 1997). The DCM can be used, for Zealand. This can be done (1) by directly applying the unit example, to infer the value of water quality from the health- value (either adjusted or unadjusted) from the USA study to care costs of water-borne disease. the policy site in New Zealand, or (2) by transferring a value The AEM looks at household behaviors in response to the function (WTP function), or (3) by using meta-analysis degradation of an environmental good. AEM can be used when which collects data from multiple sources and draws out there is a decline in quality or quantity, or loss, of an economic consistent patterns and relationships from those data regard ally valuable ecosystem good or service and expenditure is ing the links between ecological functions and the services undertaken to mitigate impacts (Springate-Baginski et al., they provide, or (4) by using preference calibration which 2009). For example, water contamination can require avertive employs existing benefit estimates from different meth or defensive behaviors to avoid adverse impacts on health odologies and combines them to develop a theoretically (Abdalla, 1994; McConnell and Rosado, 2000; and Um et al., consistent estimate. 2002). If contamination results in behavioral change such as The process of benefit transfer is complex and more buying nondurables (bottled water), liming to reduce water research is needed to evaluate the extent to which these esti acidification, boiling water for cooking and drinking, or redu mates are transferable across societies where preferences, cing the frequency or length of showers, the costs of these constraints, and institutions differ (Bateman et al., 2000; changes can be used as an estimate of the value of the ES lost Champ et al., 2003). A number of problems associated with (Birol et al., 2006). The AEM has many limitations, including benefit transfer have been highlighted, such as finding good- the inability to consider more than one avertive behavior at a quality studies of similar situations; insufficient allowance for time; separating synergistic effects (e.g., the purchase of bottled characteristics to change over space and time; the inability to

Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy Valuation of Coastal Ecosystem Services 45 measure new impacts as measures are based on previous 12.03.3.3 Limitations of Neoclassical ES Valuation studies (Turner et al., 2003); and existence of substantial Techniques transfer errors (Brouwer, 1998; Bateman et al., 2000). These Although valuation studies contribute to awareness of the impor issues have led to the development of recommendations for to tance of ecosystems to human well-being, there are a number of the use of benefit transfer (Loomis and Rosenberger, 2006). valid criticisms associated with their use. These include Chapter 12.04 provides an in-depth overview and examples of this technique. • Methods tend to value a single service, whereas ecosys The landmark study by Costanza et al. (1997) which esti tems generate a bundle of services, many of them mated the global annual value of 17 ESs is a well-recognized unacknowledged. Although it is theoretically possible to use a ecosystem valuation study utilizing benefit transfer. Since then a number of rapid ecosystem service valuation assessments variety of methods to value each different service generated by (RESAs) have been completed, many based on a simplistic an ecosystem, many ESs are only revealed when the ecosystem benefit transfer of the Costanza et al. (1997) unit value for is destroyed or species lost (Vatn and Bromley, 1994). ESs. Generally, the following steps (some of which are elabo Valuation methods do not provide a measure of ‘total eco rated on in this volume) are undertaken to complete an RESA: nomic benefits’ rather an estimate of ‘total economic benefits ’ 1. Identify all ecosystems. Chapter 12.02 provides the back able to be monetized . • ground for this. The standard ecosystem types can be It is not possible to value what we do not understand. adapted according to the interests of prospective users and There is a lack of information on the roles and function of in accordance with the valuation methodology. many ecosystems and the services they provide. Scientists 2. Create an inventory of ecosystem types. An inventory of ecosys and researchers who specialize in ecosystem research do not tem coverage may include a list or spatial geographic fully understand ecosystems and their interdependencies. information system (GIS) map with the coverage of ecosys Ecological valuations require ordinary citizens to express an tem types. opinion on the contributions of related ecological goods and 3. Ecosystem functioning. Even though some relevant ecosystems services to human well-being, which are not widely recog and their potential services are identified in step 2, this does nized or understood. This particularly applies to supporting not mean that the ecosystems function optimally to deliver or intermediate services, where the important contributions the services. This is a relevant topic for dialog among various to human well-being are indirect, for example, soil microbes stakeholders to assess the relevancy and the direction of the have an important role but most people are unaware of their science required. This aspect may be the basis for projections existence and soil scientists do not fully understand why of alternative scenarios and modeling (see Chapters 12.05, variation occurs (USEPA, 2009). Valuations are therefore 12.15 and 12.14). overly simple and lower-bound conservative estimates 4. Create an inventory of ecosystem services. Again, Chapter 12.02 (Daily, 1997). • provides the background. Valuations require technicians to perform valuation 5. Assign values. Section 12.03.2 provides an overview and studies, the results of which are provided to decision makers Chapters 12.06, 12.07, 12.08, 12.09, 12.10 and 12.11 pro who then (ideally!) integrate them somehow into market vide detailed analysis of valuation of various ESs of coasts prices or management decisions. By that time, it is quite and estuaries. possible that the prices have changed. The more important 6. Total ES values. The total area for each given ecosystem type the service and the fewer the substitutes, the more likely the is multiplied by a vector of ES values. price will change with changes in supply. In contrast, markets automatically provide new prices for goods and services in While the information generated from an RESA may be approx response to the change in supply or demand, both of which imate it can provide an indication of magnitude, for example, are continually changing. For example, when the price of the relative contribution of ES values compared with gross food and energy skyrocketed in 2008, a larger budget share domestic/regional products. This information can contribute went toward these essential and nonsubstitutable resources, to better-informed decision making as Loomis and leaving less to be allocated to other resources, including ESs. Rosenberger (2006: 344) found “… that qualitative descrip tions of benefits rarely offset monetary estimates of costs in a Market prices are also distorted by unaccounted for external cost benefit comparison… Even a simple benefit transfer, in ities, subsidies, barriers to trade, and exchange rates. this case, may provide an indication of whether the benefits Regardless of which market prices are used, it is questionable and costs are in the same order of magnitude.” as to whether volatile prices can be trusted when addressing Is an RESA worth the effort if it cannot be precise? The sustainability issues. answer from a neoclassical perspective may well be ‘no’; the • Valuation of ESs requires determining the marginal value answer from an ecological economics (EE) perspective may be of ecosystems and the services they provide. Marginal analysis ‘ ’ yes if this is regarded as one of many sources of relevant is difficult as working out the cost of the loss is dependent on information for decision making and one step in a desired many factors interacting at a number of scales. For example, the direction. The monetary values generated can contribute to a loss of 100 km2 of Amazon forest disrupts the hydrological participatory stakeholder-involved dialog. Incorporation of cycle, soil retention, and species habitat at the local scale and such values can be a small step toward including social fairness as well as ecological sustainability in the debate. climate regulation at the more global scale (Daily, 1997).

Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy 46 Valuation of Coastal Ecosystem Services

• The rights of future generations and the poor are over chance that the human race might be extinguished, and the looked. Markets at best reflect scarcity for the current possibility of this happening in the near future is considered generation, and only offer appropriate measures of marginal extremely low (Stern, 2006). value if we believe that future generations have no rights to • Complexity and interdependencies mean that deriving natural resources (Georgescu-Roegen, 1975; Bromley, 1989; valuations is fraught with uncertainty. Valuations often do Gowdy and O’Hara, 1995). Scarcity is likely to mean that not carefully analyze and communicate the level of uncertainty future generations impute very different values for all types and ignorance which always exists. of goods and services than those of current generations. As • Valuations focus on the ecological effects easiest to value there are often substantial time lags before society feels the because of data availability or available studies rather than the full costs of losing ESs, management decisions based on pre full range of ecological values that are important to maintain sent-day monetary values are likely to be flawed. Monetary ES. The interaction between the economy and the environ values weight all preferences by purchasing power and there ment is very complex with only some aspects under direct fore favor the wealthy. human control. Many biophysical data sets are incomplete. • Many people believe that decisions concerning the shared It is therefore difficult to determine cause-and-effect linkages inheritance of all species should be made democratically, and attribute change to a specific time period or activity. although even democratic decisions may ignore the rights of Numbers gained using methods such as modeling computa future generations and other species. Some would make the tion and CVM can be speculative and often vary depending on moral judgment that future generations have inalienable rights the methods and hypothesis adopted. to certain resources, which are not subject to CBA. This is not to • There are many difficulties associated with the measure say that monetary valuation cannot play a role in such circum ment of flows from or toward the environment and/or stances. For example, we might decide that high monetary measurement or estimation of changes in these flows and valuations are one measure of relative importance, and future attributing them to a time period (O’Connor and Schoer, generations should therefore be awarded inalienable rights to 2009). such resources. Alternatively, if we have very high levels of con • Aggregation across methods can be problematic. If value fidence in valuation studies, then we can compare values across estimates are in different units, combining them is not possible studies. If a small decrease in quantity of an ES leads to a large without making assumptions. If the methods used have quite increase in monetary value, this indicates that demand is inelas different (or unclear) underlying concepts of value or overlaps, tic, and that the resource is essential and nonsubstitutable, and aggregation is not possible (USEPA, 2009). In addition, aggre hence should be conserved. gation over different scales (time, geographic, or political) also • The use of discount rates as used in neoclassical valua requires clearly communicated assumptions. tions of ESs is contentious because environmental quality needs to be measured in a broader way than that expressed by standard financial transactions. The rights of future gen erations to natural capital resources should not be regarded 12.03.4 When People Do Not Perceive the Benefits of as of lesser importance than the rights of present generations. ESs Costs and benefits that occur in the future are typically exponentially discounted over time to attain their net present In Section 12.03.2, the tools discussed follow the neoclassical paradigm in that individual utility is maximized. Individual value today. Although many economists argue that a dis preferences and values predominantly have a short-term and count rate needs to be included to allow for opportunity local focus, whereas valuations associated with sustainability costs and future generations being wealthier (see, e.g., include issues of sustainable ecological scale and social distri Portney and Weyant, 1999; Nordhaus, 2007) environmental butive fairness which extend beyond efficient economic impacts such as climate change are heavily skewed toward allocation and require the reconciliation of community prefer the future (Neumayer, 2003). Even if growth becomes more ences over the long term and frequently in a hierarchical qualitative than at present, there will be a greater population context (from local to global). This tension, that often requires requiring natural-resource-based products, and, while techno the sacrifice of individual utility for the common good, is well logical progress may reduce the rate of transformation of recognized (Hardin, 1968; Clark, 1973). From an EE perspec natural to human-made capital there will always be a mini tive, while the neoclassical valuation tools are useful at the mum required resource flow (Lawn, 1999). Whether future appropriate scale, there are many limitations in applicability if a sustainable presence of humans on Earth is the goal. costs should be discounted requires consideration of the Ideally, neoclassical tools and the answers provided by them ethical issues involved when comparing the incidence of are embedded in an adaptive management framework to guard costs and benefits between generations (Stern, 2006). That against obsolete (or counterproductive) answers. Tools to the welfare of future generations should be treated on a par address ES valuations beyond the short-term, localized focus with our own is advocated by the Stern review and many remain underutilized. This section builds on Chapter 12.01, others over an extensive timeframe (Solow, 1974; Weitzman, highlighting EE-based tools, challenges, and principles, and 1998; Voinov and Farley, 2007). If a positive discount rate is references the remaining chapters in this volume for details used, the Stern review argues that it should only relate to the on the various approaches. Tradeoffs can be measured using

Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy Valuation of Coastal Ecosystem Services 47 both individual and collective values and can be in monetary make are broad in nature and not unique to EE. They recognize or nonmonetary units (scores, ratings, and rankings). An EE the need for input from a wide variety of disciplines, the need approach to valuation includes the tradeoffs between eco for experts to work with lay people, and the need for public nomic efficiency, equity, sustainability, ecological awareness. stewardship, and cultural and ethical values. It also recognizes the importance of scale when considering the long-term viabi 12.03.4.1 Ecological Indicators lity of ES. Implicitly or explicitly, people hold values and assign them Ecological indicators are measures of key ecosystem properties to what they care about in their day-to-day actions. Values can be reflecting changes in ESs and can provide information on the defined only relative to a given individual or group; value exists direction and possible magnitude of the impact or response of in the eye of the beholder and depends on the boundaries of the an ecosystem to stress. Using indicators for valuation involves system under consideration as well as the perspective with which selecting and measuring key predictive variables, which is less one perceives a system. Timing, scale, and location affect value; it complex than defining and implementing a complete ecologi is therefore not simple, static, and single, but rather complex, cal production function (USEPA, 2009). A well-defined dynamic, and multifaceted. People may have different things in indicator that is positively or negatively correlated with a spe mind when they talk about the values of ecological systems and cific ES can be used to predict change in an ES even if it not their services. As discussed in Chapter 12.01, different disciplin quantified. Such indicators can be effective because they can ary experts understand the concept of value in different ways, for detect change more rapidly. Large, complex ecological models example, from the perspective of decision science, ecology, eco that are data intensive are difficult to use for rapid evaluations nomics, philosophy and ethics, or psychology. Values can be (Hoagland and Jin, 2006). “The use of indicators that simplify based on attitude or judgment (e.g., Dietz et al., 2005)and is and synthesize underlying complexity can have advantages in both personal and communal; values can be individual and terms of both generating and effectively communicating infor utility-based and differ from community-based values, even mation about ecological effects” (USEPA, 2009: 36). within the same person. Where neoclassical economic theory Well-selected indicators make it possible to reduce ecologi assumes that fixed values need to be revealed, others advocate cal complexity to a relatively small number of easily estimated that values are changeable and constructed on an ongoing basis. parameters. Although not quantitatively valued or monetized, Different disciplines and different cultures define values differ the outputs for these indicators can be scientifically credible ently (Dietzetal.,2005) and there is no compelling reason why and, if well described by narratives or quantitative/qualitative we should prioritize one language of valuation, such as an grades, easily understood by the public (USEPA, 2009). economist’s over another (Martinez-Alier, 2002). Well-selected indicators can also capture spiritual, cul The need to use numerous types of valuation is especially tural, and aesthetic values, which are often not appropriate evident when the topic is complex and uncertain. The value to express in monetary terms. Nonmonetary indicators concept for ES is inherently dynamic and comparative as is the deducted from interviews, quantitative surveys, and other determination of what difference something makes. In eco analyses by social science methods can generate informa nomic valuations, this fluctuation/variation shows up in the tion about directional change in deeply held beliefs of calculation of marginal CBA. In policy development, evalua individuals and groups and the benefits they derive from tions may involve the comparison of scenario analysis ecosystems (Granek et al., 2009). (see Chapters 12.15 and 12.14). To make the distinction clear, Indicators fill a gap as no single evaluation scheme works we refer to evaluation of inherent tradeoffs rather than valua well over all circumstances, scales, and locations. They provide tion. ES evaluation from an EE perspective recognizes that a framework that can allow rapid assessments of potential ecosystems can cross an irreversible threshold into an altered ecosystem change or loss to warn us about, and away from, state, thereby no longer providing certain ESs. However, eco thresholds of dramatic declines in ESs. Well-defined indicators systems are complex, nested, dynamic, and adaptable systems allow monitoring of ecosystem conditions and the direction of that do not always lend themselves well to predictions regard change. ing time, scale, and the direction of perturbations. Indicators can be used to address uncertainty and mitigate When changes in a system exert pressures that no longer vulnerability in managed ecosystems. Indicators have been yield simple or predictable effects, marginal analysis is no developed for a range of ecosystems; for example, Beier et al. longer viable. When the ecosystem is forced away from equili (2008) use indicators to show ecological capacity to support brium, the relevant value concepts shift from utility to risk fish/wildlife populations (provision); human acquisition of avoidance. Ecological values then become more closely aligned fish/wildlife resources (use); and intensity of logging and to the amount people are willing to pay for protection against related land-use change (disturbance). the risk of destabilization (Limburg et al., 2002). The methods discussed in the following section place less 12.03.4.2 Participation and Stakeholder Involvement in importance on economic benefits that can be measured and Policymaking more on the contribution of ESs that may ultimately be most important to society. These evaluations attempt to reflect the Stakeholder involvement, through group deliberation, values that people hold and would express if they were well enhances ES evaluation. “Derived from social and political informed about the relevant ecological and human well-being theory, this valuation approach is based on democratic princi factors. ples and the assumption that values should not be based on The following evaluation techniques that can be used to the aggregation of individual preferences but as a result of provide information about the important contribution ESs open public debate” (de Groot et al., 2002:404). Where

Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy 48 Valuation of Coastal Ecosystem Services circumstances permit, encouraging stakeholders to reach con While the public needs relevant science to make an informed sensus on assigning subjective values to ESs enables social judgment basing evaluations on the personal preferences of influence and consensus to define knowledge about the value scientists or experts rather than those of the general public of WSs (Cowling et al., 2008). undermines the usual presumptions that public involvement Well-facilitated, transparent, stakeholder deliberation is central to democratic governance (e.g., Berelson, 1952; allows expression of these values as well as knowledge transfer USEPA, 2009). in a process that builds trust, accountability, and legitimacy. A We make a distinction between public participation and broad understanding can be constructed of not just ecological stakeholder participation, even though the public is a stake functions and services but also the property rights, institutional holder party as well. Public involvement is difficult to manage arrangements, and fairness criteria that impact on them. Early for a number of reasons. Regardless of incentives, publicity, involvement of stakeholders through surveys, interviews, focus and effort, many citizens are excluded either by choice or by the groups, deliberation and mediated modeling activities, and so selection process so stakeholder involvement is frequently not forth helps to identify ecological responses that people care inclusive of all relevant interests. Consensus outcomes from about and allows them to express the tradeoffs they are willing deliberation cannot solely be counted on, as value conflicts to make, as well as detect potential unintended consequences have the potential to make deliberation intractable of policy proposals. (Mendelberg cited by Dietz et al., 2005: 363). The contribution discourse can make to establishing values is well recognized (see Madison and Hamilton in their articles 12.03.4.3 Knowledge Integration on behalf of the Federalists which were written in 1787 and 1788 and provided the principal theoretical work for the Science, with its focus on coherent data, information provi Constitution). Dewey (1939/1988) and more recently sion and ways of identifying patterns, and structures of Habermas (1991) have emphasized the importance of conver systems in space and time, plays an important role in under sation in shaping choices and influencing the decisions we standing co-evolving systems and providing input into make in life. To quote Dietz et al. (2005: 63), “Dewey and political and participatory processes. In an adaptive manage Habermas are making an even stronger point – that over one’s ment context, data and information are important elements. life, communication with other individuals shapes and Maintaining ES to prevent reductions in human well-being reshapes the emphasis we place on values. Our sense of identity requires understanding of how natural systems work, how and the values to which we give greatest weight are developed humans alter them, what is important to protect, and what by interaction with others whose views we respect. And in this the tradeoffs are to do this. Being able to value ESs from both way, a community develops commonality in its values, an economic and an ecological perspective is a necessary although never perfect agreement. Dewey and Habermas hold (though not total) ingredient in practical policy (Costanza that real rationality is deliberative rationality, not the isolated and Farber, 2002). expression of individual preferences, and suggest that delibera The complexity of biophysical and human systems requires tion can lead to reﬂection and value change.” a common set of facts to clearly communicate the potential If preferences and values regarding ecological systems and consequences management alternatives could have on the suite services are not well formed and are instead constructed, they of existing ESs. Credible scientific information (from both the may not be accurately measured or characterized by valuation natural and social sciences) is essential for both the political methods that assume well-formed preferences. For example, process and public participation as “it can provide a common some individuals have strongly held values that they find diffi set of facts on which to base political negotiations” (Granek cult, impossible, or inappropriate to express in monetary units. et al., 2009: 209). Requiring these individuals to express such values in monetary Collaboration among scientists from different disciplines equivalents (e.g., in a survey) may compel them to assume a working on ES studies is required to avoid giving decision perspective that is unfamiliar or even offensive. Evaluation makers conflicting or confusing information and to provide methods based on discourse and deliberation are designed to a more complete analysis. “For example, scientists working on make explicit and facilitate the construction of preferences in restoration of salt ponds to tidal marshes in South San such contexts (USEPA, 2009). Francisco Bay may offer information on how quickly ponds Stakeholder involvement can also take the form of direct fill with sediment once tidal action is restored, but ignore involvement such as referenda (where citizens vote for or against other aspects of changing tidal dynamics. Although their a proposal after the provision of information and debate) or results may show that tidal marsh restoration increases habi more indirectly by allowing submissions to be made on pro tat for endangered birds and mice, the creation of a new posed plans and policies which are taken into consideration sediment sink in the South Bay and adjustment of estuarine during decision making. Although unilateral, both inputs pro hydrology that results from opening the ponds may cause vide a means of valuing ES as they indicate what level of tradeoff erosion of tidal flats elsewhere in South Bay and a concomi a community is willing to make. Other deliberative processes tant loss of shorebird habitat (Warnock and Takekawa, such as mediated modeling (see Chapter 12.05), action plan 1995)” (Granek et al., 2009: 210). ning, and citizens juries also provide avenues for stakeholder The role of science in ES evaluation is not limited to the involvement and a structured way of ranking alternative options natural sciences. Other types of science are equally relevant, for or assessing the monetary levels of payment required to com example, political science can make a significant contribution pensate for loss from a public values perspective. to identifying and building appropriate institutional structures Stakeholder involvement is critical, as the ultimate objective that recognize the contribution of ES and manage ES more of any evaluation exercise is to assess the values of the public. effectively. At the land–sea interface, the overlap of multiple

Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy Valuation of Coastal Ecosystem Services 49 political jurisdictions and economic sectors makes it difficult adds to the knowledge of the decision maker and is greatly for groups to work effectively without sound governance struc aided by the inclusion of the decision maker in each step of the tures. Economics is similarly important as decision makers are analysis; it is ideally deployed in a stakeholder participatory likely to be more concerned at the loss of a coastal ecosystem if context. An important part of the process is an extensive sensi it can be directly related to reduced fishing income or flood tivity and robustness analysis (Roy, 1998) to explore how damage. different preferences affect the outcome of the aggregation and how robust the compromise rank order is with respect to deviations in the preferences. MCA is shown to be an appro 12.03.4.4 Multicriteria Analysis priate evaluation framework that can account for a range of Quantitative methods such as multicriteria analysis (MCA) values, whether cardinal or ordinal, and preferences. It is there provide an alternative or complementary approach to valua fore argued that MCA can help overcome concerns with tion and decision making which are not reliant on monetary monetary valuation methods and using unstructured, ad-hoc units. These methods instead operationalize relativity and techniques. The ultimate outcome is a preferred option, or set ranking for use in decision making and values are expressed of options, that is based upon a rigorous definition of priorities in a diversity of ways such as cubic meters of clean water, jobs and preferences decided upon by the decision maker. Several created, or species saved. A multicriteria framework is suggested iterations of the process and interactions between the analyst when valuing across the efficiency, sustainability, and equity and decision maker can further aid the decision making implications of natural capital consumption (Costanza and (Proctor and Drechsler, 2006; Proctor, 2009). The need to Folke, 1997). The MCA approach presents tradeoffs as a set of incorporate multiple decision-makers’ perspectives into an identified alternatives. This is appropriate when alternatives MCA has led to the development of the process known as can or have been identified and an awareness or concrete deliberative multicriteria evaluation (DMCE) (Proctor and perception of the alternatives has been formed. Drechsler, 2006). DMCE combines structuring of the deci A theoretical justification for the use of MCA is the existence sion-making process (MCA) with a deliberative procedure of ‘weak comparability’ in the consequences of action. This (the Citizens’ Jury). means that there is not a single principle of comparison by Disadvantages of MCA include the following: which all different actions can be ranked (Martinez-Alier et al., 1998). MCA therefore does not provide a unique criterion for 1. it is a static approach that does not allow for understanding choice, but instead helps to frame a problem, in a multidimen the systemic changes and uncertainty associated with sus sional way, to achieve a political compromise decision (Munda tainable development; et al., 1994; Martinez-Alier et al., 1998). 2. it can be mistrusted if regarded as a technocratic instrument According to Proctor (2009:72–73) “Multi-criteria analysis that can be manipulated (Janssen, 2001); and (MCA) is a means of simplifying complex decision-making 3. it creates weights that are credible, justifiable, difficult and tasks that may involve many stakeholders, a diversity of possi ideally should be the outcome of a public participatory ble outcomes and many and sometimes intangible criteria by process (Yeh et al., 1999). which to assess the outcomes. In many public decision pro blems, such as those involved with environmental policy, the objectives of the decision may conflict with each other, and the 12.03.4.5 Scenarios criteria used to assess the effectiveness of different policy options may vary in importance. Multi-criteria analysis is an Scenarios can be static where the value properties of two or effective technique to identify trade-offs in the decision-making more scenarios are compared, or dynamic when looking at process with the ultimate goal of achieving a most favored outcome ecosystem change overtime. Applying scenario modeling to for the stakeholders involved” (italics in original). understanding pressures on ecosystems and change overtime Structuring the decision-making process and making is important as current ES losses and degradation may limit explicit the logical thought process that is implicitly carried future options and predetermine the choices we have. “[As] the out by an individual when coming to a decision is a step force of humanity increases on the planet, ecosystem service often lost in the complexity of the issues. In general, an MCA valuation may need to switch from choosing among resources seeks to identify the alternatives or options that are to be to valuing the avoidance of catastrophic ecosystem change” investigated in coming to a decision, establishes a set of (Limburg et al., 2002: 409). criteria by which to rank these alternatives, the preferences, Scenario planning is an accessible way to present desired or weights the stakeholders assign to the various criteria, and or undesired alternatives to a broad range of stakeholders. provides an aggregation procedure by which the criteria-spe Scenarios can project current trends framed as business as cific rank orders are aggregated into a single compromise usual to compare with options designed to protect ecosystem rank order (Proctor and Drechsler, 2006: 172). Raaijmakers and their services. “Uncertainty is dealt with by providing et al. (2008) have used extended MCA in a spatial frame plausible, descriptive narratives or pathways to the future. work to look at flood risk perception (characterized by Having defined a scenario investigations are about what awareness, worry, and preparedness) and how land-use pol commitments this scenario might entail” (Cowling et al., icy and natural vegetation can be used to reduce risk to 2008). inhabitants for the Ebro Delta in Spain. Scenario techniques were developed by the business sector It is argued that the benefits of MCA are not in the outcome not to predict the future with complete accuracy but as a tool to or the single optimal solution but in unraveling the decision- use to facilitate preparedness, challenge ways of thinking, making process and the increase in knowledge as a result. MCA promote collaborative learning, and understand tradeoffs

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(Schwartz, 1991). Scenario planning has been used to good systems and the policy alternatives available based on different effect in the natural resource sector (Cowling et al., 2008) and model outputs and scenarios. While neoclassical economic was used extensively to explore potential changes in ESs by the tools are suited to marginal changes in ecological conditions, Millennium Ecosystem Assessment (2005). for larger changes, EE modeling analysis is necessary as such The use of scenario analysis provides a way to value alter change can have substantial local or national implications. native pathways into sustainable and desirable futures. 12.14 ESs are complex systems and valuations have typically been elaborates on this topic to conclude this volume. driven by short-term human preferences (Limburg et al., 2002). Dynamic modeling provides a way to take into account the interconnectedness and interdependencies between certain eco 12.03.4.6 Mapping and Modeling logical functions services and values (Boumans et al., 2002). Computer-based modeling assists in thinking about complex Time lags and feedback loops can be more easily illustrated integrated data sets and system dynamics. Models have differ over long time periods and the risk of double counting (which ent strengths and weaknesses that enable them to be used can occur when separately measured individual preferences are synergistically as assessment tools. Instead of focusing on a aggregated) is reduced. As ecological functions and services over single ES, modeling incorporates the best available scientific lap, valuations need to take into account interdependencies and knowledge of how ecosystems function and respond to pertur the nonlinear dynamic properties of ecosystems bations over greater temporal and spatial scales. Data both in As with all tools, models have their limitations. Their tech map and other formats can describe many aspects of ES and nical complexity makes them expensive to build, difficult for contribute to understanding and knowledge. the public to interpret, and the outputs generated only as reli Scenarios can be cast as qualitative narratives or supported able as the data the models use. The statistical uncertainty of by specialized quantitative computer-based modeling analy models needs to be acknowledged, as they are representations sis. Evaluation exercises from an EE perspective require of reality and at best as accurate as current knowledge of the consideration of what benefits or costs are relevant for inclu functions and dynamics of an ecological system. There are still sion; whether current incomes and distributions are fair and significant knowledge gaps when it comes to understanding appropriate for use in measuring values; and what is fair or ecosystems and their services “Translating the responses pre unfair in terms of inter- and intra-generation equity. Clearly, a dicted by standard ecological models into responses in terms of transparent evaluation exercise begins by defining any ecosystem services or features that can then be valued is a assumptions made in regard to these questions, thus high challenge” (USEPA, 2009: 22). lighting that the evaluation exercise is but one scenario among For an in-depth presentation on integrated modeling for many possible alternatives. Incorporating community-based estuaries and coasts, we refer to Chapter 12.05. values can be achieved through surveys or inferred from observation of individuals or groups interacting with compu 12.03.4.7 Payments for ESs ter-simulated environments In all modeling, there is a tradeoff between the capacity of Payments for ecosystem services (PES) are a clear example of answering broad questions (where the purpose of the model is how valuation of ES has made it from a theoretical concept to understand an underlying system) versus narrow and speci through the policy and communication process. fic questions (where the purpose tends to be prediction). PES is a fairly new policy tool that has received considerable Models are only useful to the extent that they answer the attention in recent years, both in the academic literature and in questions the model sets out to answer. The spatial and visual on-ground applications (Engel et al., 2008). It requires those that representation of change in the supply and demand for ES benefit from ESs to pay for their provision and restoration. using GIS can provide an indication of economic value and Because ESs themselves are often difficult to measure, payments community values. What is modeled is generally restricted due are usually made for adopting land uses associated with the to the technical complexity of models. Specific, but detailed provision of the services. PES can be economically efficient when models, such as computable general equilibrium and input ever the additional value of services generated by an alternative output models, referred to as ‘research models’ (Costanza and land use is greater than the costs of adopting that use, including Ruth, 1998), are frequently used to answer precise issue-based the actual costs of implementation, opportunity costs, and the questions. More integrated ‘management models’ have broader transaction costs of negotiating an agreement. In practice, pay application and are developed more to quantitatively explore a ments are generally based on the costs of implementation rather range of questions and get an understanding of how addressing than estimated values of the services generated (Wunder, 2007). one issue can impact on other areas. These models are based PES can be implemented (1) by integrating ESs into markets or more on understanding linkages, time lags, and feedbacks and (2) by institutional arrangements. can involve the integration of a number of individual research models. 12.03.4.7.1 Integrating ecosystem services into markets Ecological production functions are models that specify and Wunder (2005:3) uses five criteria to describe the PES princi parametrize the components, processes, and functioning of the ple. It is a “voluntary transaction where a well-defined ecosystem that underlie and generate the ESs. These models can environmental service (or a land use likely to secure that provide a basis for estimating changes in ecosystems and the service) is being ‘bought’ by a (minimum one) service envir services they provide and are regarded as an essential first step onmental service buyer from a (minimum one) environmental in any valuation (USEPA, 2009). service provider if and only if the environmental service provi Modeling can provide an avenue for collective learning der secures environmental service provision (conditionality)” about natural systems and their interaction with economic (italics in original).

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If we replace environmental service with ‘commodity’,we resources, individuals may choose to free ride on the contribu have the basic definition of any market transaction. The tions of others, and voluntary cooperation may be inadequate. approach here builds on the work of Coase, who argued that We must also recognize that services are an emergent phenom environmental externalities could be efficiently eliminated ena of complex, poorly understood ecosystems, and are through voluntary market negotiations as long as property produced as a bundle rather than separately. Payments for a rights were clearly defined, and transaction costs were low single service promote the management of ecosystems for a (Coase, 1960). Coasean solutions to the provision of ESs single service, often at the cost of others. For example, while require creating property rights where none previously existed targeting forest conservation based solely on carbon sequestra then making those rights tradable, or redefining property rights tion also improves biodiversity conservation, targeting both to allow the buying and selling of ESs with accompanying biodiversity protection and carbon sequestration simulta contractual obligations (Pearce and Turner, 1990; Muradian neously may allow doubling the former at a cost of 4–8% in et al., 2010). the latter (Venter et al., 2009). Few PES schemes actually meet all the requirements of the We are just learning how to manage and restore many market definition. Schemes that fall short but are still imple coastal ecosystems and their services, such as coral reefs mented are known as PES-like. Practitioners seeking to adapt (Rinkevich, 2008), oyster reefs (Grabowski et al., 2007), and ESs to market institutions often claim that the most successful mangroves (Moberg and Rönnbäck, 2003). We need to learn PES and PES-like schemes are those involving private sector these strategies quickly, or risk losing vital ecosystems. Some rather than public institutions (Engel et al., 2008; Wunder PES efforts may fail, but they nonetheless provide valuable et al., 2008). knowledge about how to proceed in the future, and are worth funding in the absence of conditionality. Because this knowl 12.03.4.7.2 Adapting institutions to ESs edge is a public good, it makes sense for public sector An alternative approach to PES seeks to adapt institutions to institutions to pay for its provision. the physical characteristics of ESs, and to the social context in In conclusion, the market-based approach to PES may be which they are found. In this case, PES is defined as “a transfer suitable for services that are rival and can be made exclud of resources between social actors, which aims to create incen able. In the context of coastal ecosystems, this primarily tives to align individual and/or collective land use decisions includes fisheries, waste absorption capacity, and recreation. with the social interest in the management of natural Even here, public institutions that create and defend private resources” (Muradian et al., 2010: 1205). property rights are prerequisites for PES. PES for nonrival or Relevant service characteristics include rivalry, excludability, nonexcludable resources is more challenging, and public and complexity. Because use of a rival resource for one purpose institutions may be preferable. In many cases, public insti leaves less for other purposes, there is competition for use. tutions may be better vehicles for payments than private Rival services should be rationed when they are scarce to ensure ones. Direct comparison of the effectiveness of market ver they are allocated toward appropriate uses and to prevent their susnonmarket PES schemesisextremelydifficult, asthey excessive use. For example, the waste absorption capacity of are typically used for services with fundamentally different coastal waters is scarce, and should be rationed to prevent characteristics. excessive use, and access to fisheries should be rationed to prevent depletion. Price rationing is one option, but may not be desirable if just distribution is a concern. 12.03.5 Conclusion Rationing requires excludability, which in turn requires a public institution (or institution that serves the public) at the (E)valuations of ecosystems in coastal zones are required for scale of the problem. Many countries ration access to both the many purposes. These include capturing the attention of the waste absorption capacity of ecosystems and to fisheries; how public and policymakers, contemplating tradeoffs, setting prio ever, if fish populations or pollution flows cross national rities, identifying critical ecosystems or ecological resources, and boundaries, then some form of international agreement is making decisions about protection, remediation, restoration, more appropriate. and redevelopment. ES (e)valuation can assist in determining Nonrival resources should be open access as rationing sim how to best protect coastal ecosystems and resources and com ply reduces their value as discussed previously. Nonexcludable municate best management approaches. However, care needs to resources are open access by definition and cannot be rationed. be taken that valuations are not taken as exchange value to Market forces will not pay for the provision or protection of determine what (from a narrow economic viewpoint) should open-access resources. While largely known for suggesting mar be preserved or used as input for consumptive, economic pur ket solutions to environmental externalities, Coase’s broader poses. The complexity of coastal ES means that valuations are point was that these only work where transaction costs are low. subject to high levels of uncertainty and ignorance. Transaction costs for market solutions to externalities involving The type of valuation to use and whether it should be nonrival and nonexcludable resource are prohibitively high, monetary or in some other unit of measure is best determined and solutions require public institutions (Coase, 1988). by the decision context. For example, if the timescale is short, Provision and protection of open-access resources must be a the benefits are well understood and public involvement is not cooperative social effort, and public protection of coastal eco required, the neoclassical economic methods described in systems is quite common. Section 12.03.2 may provide a relevant starting point. In Public institutions can force contributions, via taxes, for contrast, if implications are large scale, long term in nature, example, so PES systems need not be voluntary. Given the and involve both high levels of uncertainty and multiple choice to contribute or not contribute to protecting open-access stakeholders with varying value positions, a more dynamic

Treatise on Estuarine and Coastal Science, 2011, Vol.12, 35-54, DOI: 10.1016/B978-0-12-374711-2.01203-1 Author's personal copy 52 Valuation of Coastal Ecosystem Services multi-attribute approach is preferable. Depending upon the Catton, W.R., 1982. Overshoot: The Ecological Basis of Revolutionary Change. context, the weighing and balancing of competing interests University of Illinois Press, Champaign, IL. Champ, A.P., Boyle, K.J., Brown, T.C., (Eds.), 2003. The Economics of Non-Market might require a collaborative, adaptive management, deci Goods and Resources. Kluwer, Dordrecht. sion-aiding process which is bolstered by relevant science. The Clark, C.W., 1973. The economics of overexploitation. Science 181, 630–634. use of one or a combination of the emerging tools described in Coase, R., 1960. The problem of social cost. Journal of Law and Economics 3, 1– Section 12.03.3 may provide the necessary support. 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