Thursday, August 21, 2014

Where does the value of nature come from?

$125 trillion is no small chunk of change. You could, without a doubt, buy a lot of stuff with that in your pocket. In fact, it's more than the world's gross domestic product (GDP), or the value of all the goods and services produced in the global economy each year - everything from cars to haircuts to World Cup tickets. But according to a recent study led by Bob Costanza, $125 trillion is also the dollar equivalent of what all the work the world's ecosystems do for us - things that aren't normally counted in GDP, like the flood damage a coastal wetland prevents. The $33 trillion mark and other figures like it vary widely while provoking much controversy...and are increasingly taken by world political and business leaders as self-evident, touted as the next big thing in conservation.

$125 trillion is a best guesstimate. It's a follow-up to Costanza's landmark 1997 paper in which he and colleagues suggested the number might be more like $33 trillion. At the time, other researchers had reviewed existing valuation studies, finding that overall an acre of wetlands might be valued anywhere between six cents and over $22,000! Other commentators noted that looking at just one particular ecological function (say, flood prevention), the values researchers came up with could differ by two orders of magnitude from site to site. For many critics, these numbers imply the reduction of nature to something to be bought and sold, which is particularly problematic if they're going to fluctuate so wildly. For others, no matter the range of values, they just aren't helpful - they're all a "serious underestimate of infinity" because we simply can't do without many of things nature does for us, like provide breathable air. Still, for a growing number of conservationists and decision-makers, putting some number - often a dollar value - on ecosystems is exactly what's needed to save it, to show policy makers and businesses the economic importance of nature, in hopes of preventing its destruction and encouraging its conservation.

So where do these numbers come from?

It's appealing to write-off statements like, "the value of an acre of wetland is six cents," as simply the work of ivory tower intellectuals busily justifying their own existence. After all, the scholars who published the most recent study are all affiliated with an academic institution. It's also easy to get the sense that these numbers come from no place in particular. That's the feeling you get reading histories of the ecosystem service concept (see here and here). These papers do important work revealing that the valuation of nature just didn't come along in 1997 with Costanza et al.'s first estimate of the value of the world's ecosystems. But beyond having a history, behind Costanza et al.'s new number and the “modelling sausage” that spit it out is a body of literature, a set of theories, and communities of scholars called environmental and ecological economics. And this community and its history is grounded in place. Valuing nature didn't just appear from out of nowhere. Environmental, and its younger, upstart cousin, ecological, economics and the basis for valuing nature come out of a long-standing engagement with wetlands, especially coastal marshes, and particularly as they faced development pressure, often from the oil/gas industry. When ecologist Eugene Odum and economist Len Shabman sparred in the 1970s over how exactly conceptually and empirically to get at nature's value, their material was Gulf Coast marshes. Today, in a post-Hurricanes Katrina and Sandy world, when we hear prominent arguments for restoring or conserving ecosystem services because of their value, it's coastal places like Mobile Bay, AL that are paraded out as examples of where coastal restoration "show strong returns on dollars invested." It's the US Gulf Coast that has defined nature's valuation as we know it today - its methodology and policy advocacy - and will continue to shape it in the wake of the 2010 Deepwater Horizon oil spill.

The Gulf Coast oil and gas industry's payments to oystermen for access to lay pipelines across harvesting grounds mark economists', conservationists', and others' earliest struggles with valuing nature's goods and services beyond the confines of established markets. The Gulf's hydrocarbon industry grew significantly following World War II in order to meet growing demand from suburban consumers, as Jason Theriot details in his great new book about the twin histories of the industry and wetland loss and protection in the Gulf. But, of course, companies like Tennessee Gas needed to get their products to market - mainly on the rapidly urbanizing east coast - from wells in the middle of Louisiana's marshes. To do so, they laid hundreds of miles of pipelines in canals carved through wetlands. These areas, however, were often the same spots where oystermen had traditionally harvested. At the time, in the 1950s, the ecological consequences of the kinds of hydrological disruptions caused by canals were already to some extent understood by fishermen and scientists alike: the catch would likely be diminished from any nearby canals. In part because many working in the hydrocarbon industry were local oyster experts themselves and in part because of the influence the fisheries community had historically exerted on state regulators, oil and gas companies went out of their way to provide compensation for direct damages from pipelines. What the industry paid was simply what the expected catch would have fetched on the open market. In paying oystermen for losses to their harvest, oil and gas companies were acknowledging:the broader effects of their activities, but still had some market signal to guide them; they were not trying to compensate for things without market prices like water quality that environmental economics pioneers like Dales were first proposing at the time. The industry's payments were ad hoc and not meant to be a systematic assessment of all of the what we would now call ecosystem services a wetland provided. Still, conservationists seemed to be at least considering for the first time about what values the market wouldn't capture. For instance, the chief of the Oyster Division of Louisiana's Wildlife and Fisheries Commission was particularly concerned that compensation would not account for long-term, large-scale effects:

we feel that the long range effects resulting in permanent ecological changes are by far the most serious and the most difficult to assess damages for. Direct effects are largely a matter of obtaining ROW [right of way] and making adjustments for damages at the time of construction. The area involved is comparatively small and involves only the path of the canal and the immediate vicinity on each side. Ecological and hydrographic changes may be permanent and may affect extensive areas ten miles or more on either side of the canal.” (58)

Into the 60s and 70s, conservationists at Louisiana's state environmental agencies and at Louisiana State University (LSU) continued calling for a more formal recognition of the importance of wetlands, as part of a growing movement nationwide to daylight corporate and government decision-making that had impacts on the environment. As the story goes, in1969, the massive oil spill offshore of Santa Barbara, CA inspired Congress to pass the National Environmental Policy Act (NEPA), which required all federal agencies to undertake a formal review of the costs and benefits of any action with a major effect on the environment. NEPA, however, did not require agencies to monetize these costs and benefits in order to evaluate projects. Ultimately, with executive orders from Reagan and successive administrations requiring more cost benefit analysis (CBA), monetization became the default. Already by the 70s, the Army Corps of Engineers had been conducting CBAs of its projects. As Tennessee Gas looked to the dock price of oysters to account for some of the broader effects of its pipeline canals, the corps might determine whether or not to build a dam based on the cost to fisheries weighed against the benefits, measurable in dollar terms, arising from new recreation opportunities.

CBAs accounted for only so much of what conservationists thought was important about coastal habitats. ← This if anything is the constant refrain throughout the history of nature's valuation, from both advocates and critics: what are we counting? CBA might assess how a levee project would cost in damages made to fisheries, but at the time there were few techniques for accounting for the loss of storm surge protection that came from impounding wetlands. Easily the landmark piece decrying the limits of CBA was James Gosselink, Eugene Odum, and R.M. Pope's 1974 paper, “The Value of the Tidal Marsh”. It was a short white paper written for the LSU Center for Wetland Resources, but nonetheless recieved remarkable national attention from wetland conservationists as they made their case in the 70s for increasing resource protection. Gosselink et al.'s aims were to counterbalance development pressure on coastal ecosystems by expanding what ought to be counted as monetary cost from development. For instance, they valued the waste assimilation capacity of wetlands by looking at what it might cost regions to fully treat their sewage if all wetlands imply vanished and were replaced with wastewater plants. This “replacement cost” was not a market price, but was an existing signal (and it's measures like these that led to some of the most famous examples of institutional payments for ecosystem services, namely New York City's payment to farmers in the city's watershed to conserve natural habitat, which has reduced the region's water treatment costs.) The group, in the end, described wetland value in terms of $/acre/yr, but how they got their was through the concept of "emergy.” Emergy is a neologism for the amount of solar energy embodied in an ecological good or service. This could be converted into monetary terms by comparing the caloric requirements for service production in a wetland to the price to burn calories in things like oil that do have a market price. It may sound a little convoluted today, but the idea still has some traction. What's important about the emergy argument is that it proposes that nature's value is intrinsic; value arises from ecological transfrormations of energy, rather than supply and demand. Not surprisingly, this upset many economists, some of whom thought the idea went against some of the fundamental tenets of their discipline, in which value is fundamentally relative, dependent on the vagaries of supply and demand, and ultimately, how much rational subjects desired certain things. This is precisely what Gosselink et al. were skeptical of: if we believe neoclassical economics, nature has no value because it has no market price. But of course nature has value and so it must reside somewhere in nature. As one research team later put it, “The point that must be stressed is that the economic value of ecosystems is connected to their physical, chemical, and biological role in the overall
system, whether the public fully recognizes that role or not.” (emphasis in original) Politically, this perspective translated into an argument to not leave wetland protection to the whims of the market, but for better government planning. That would be something at least Gosselink would be more involved with in the next decade, contributing to the consolidation of Louisiana's modern oil/wetland regulatory regime while leading environmental reviews of projects like the massive Louisiana Offshore Oil Port.

One student of Howard Odum – Eugene's brother and collaborator - was none other than Bob Costanza, lead author of the 2014 paper valuing the world's ecosystem services at $33 trillion. After graduating from the University of Florida in the late 70s, he got a job at LSU. As he recalls it, he was in part drawn there by the presence of Herman Daly, whose work was moving in similar directions and had been an inspiration, and who happened to show up at his job talk. LSU at the time would have been a hub of activity focused on valuing nature, through coastal marshes, with Gosselink, Costanza, and Daly all pioneering in their own way and Eugene Turner, another freshly-minted student of Odum, making headway on understanding the ecological effects of oil and gas canals on the coast. Throughout the 80s (and to some extent into today) Costanza would publish on the ecological and economic facets of Louisianan and Gulf wetlands. In one paper in particular, 1989's “Valuation and Management of Wetland Ecosystems,” he and his co-authors produced another estimate of Louisiana's wetlands, a follow-up to Gosselink et al. Like Gosselink et al., Costanza, Maxwell, and Farber conducted an emergy analysis. But they also did something different: besides counting calories or looking at the market rate of fish raised by coastal estuaries, they actually hit the pavement (a boat ramp parking lot, actually) and asked people what wetlands were worth to them. The technique is known as contingent valuation. What they were after was people's "revealed" preferences - the amount each person spent on gas to get themselves to a wetland to fish could be considered part of its value, as a provider of a recreational service. The researchers were also interested in "stated" preferences - what people say they would pay to protect a wetland. If you're thinking that preferences sounds a lot more in line with the neoclassical economics approach than with the emergy perspective, you'd be right. We might read Costanza et al.'s paper as a sort of continental divide in the valuation of nature: the first half an emergy analysis focused on elucidating the inherent values of nature, a perspective that was prominent up until that point, the second half all about new techniques to get after how much society desires wetlands in practice, regardless of what nature has to say about it, new and exciting methodolgies that were about to get their trial by fire (see below). And this sort of split reflects where Costanza et al. end up in the paper when it comes to policy recommendations: they suggest that oil and gas companies provide bonds to cover the mitigation of their impacts. The amount of the bond would be based on the predicted extent and nature of the impacts, and depending on the final ecological outcome, the company would get more or less of its bond back. The researchers' argument here was not for better planning to restrict where the oil and gas industry could work, but to modify the industry's accounting practices, something that is all the rage now, with TEEB and TNC working hard at incorporating green accounting in business.

Here's the thing about contingent valuation: it doesn't work. Economists often expect people to behave rationally, but asking people how much they would pay to protect pelicans has presented economists with a number of persistently thorny issues. For instance, when researchers ask people how much they would pay to protect a nearby natural area from a hypothetical development scenario, people regularly act strategically and give “protest” answers. They'll say $0, insinuating that the park is priceless, or offer some absurdly high price, all in the belief that there may be an actual development project in the works and that their answers may stop it. It also turns out that people don't value twice as much wetland at twice the price. It was another “largest to date” oil spill – the Exxon Valdez tanker leak in 1989 - that brought to a head many of the methodological concerns surrounding the use of contingent valuation (in theory and applied to real cases). Economists and regulators alike asked themselves, how do we figure out how much damage the tanker spill has caused to wildlife? What about the value someone in Iowa places on the mere existence of some species in Alaska? NOAA, in charge of the clean-up, commissioned a study led by some of the top minds not just in environmental economnics but economics writ large - Nobel Prize winners like Kenneth Arrow - to see if contingent valuation was a proper method to use. They found that it was, and the courts have affirmed NOAA's prerogative to use it. But rarely it has.

Instead, NOAA has tended to employ good ole replacement cost. If it costs $100 million to buy all the construction equipment, fill, and plants to replace a wetland degraded by a Chevron oil spill, then Chevron must pay that amount. Like contingent valuation, the problem with replacement cost, as practiced in NRDA compensation, is that it doesn't work. The cost of replacing ecological structure doesn't necessarily equal the cost of lost ecological functions. It's one thing to put the right kinds and quantity of plants back in; it's another to make sure that the ecosystem is providing the same kind of flood mitigation service, for instance.

Doubts about the object and goal of compensation are precisely what are haunting economists yet again following the lastest “largest oil spill to date,” the Deepwater Horizon spill. It inspired a revisiting of the contingent valuation question with some authors revising their position from 20 years ago post-Exxon Valdez. Diamond, for instance, is now even more critical of contingent valuation and more skeptical that it could ever be of much use. Some number is not better than no number. Meanwhile, the spill has become a poster child for ecosystem service valuation advocates. In the monumental TEEB synthesis report, the section on “Applying the Approach” begins with the lamentation that if only the value of wetland services had been properly accounted for in business practice, BP would have never let the spill happen.

What is clear from the Deepwater Horizon fallout is that beyond whatever BP ends up having to pay to compensate for affected wetlands, they're going to have to pay separate fines into another fund to be used for large-scale restoration of the coast, beyond specific places the spill reached. This is a (bitter) windfall for conservationists; as one put it -"This is a once in a lifetime opportunity" to do something about Louisiana's land loss problem. BP money, at least in Louisiana, will be funneled into the Master Plan the state's CPRA has developed. The Master Plan lays out restoration principles and priorities (e.g. let nature do the work - harness the Mississippi River to deliver sediments to open water to build new land) and describes a suite of sites selected for restoration. These sites were selected based on their cost effectiveness, which in part has been a question of how many ecosystem services restoration will bring - how much flood prevention or how many alligators, for instance. The question here has is not so much the cash value of these services; the authors of the Plan explicitly note: "We didn't have the time this time around to look at that." As the head of the CPRA noted, however, this kind of analysis is in the works for the next version of the Master Plan, coming in 2017. At the heart of the matter is the development and deployment of economic valuation techniques for evaluating public spending. Economists are hard at work determining what kinds of restoration are most worthwhile: how many acres will $X in sediment diversions bring in over time compared to other methods of marsh creation? So far, acreage - a fairly straightforward metric - has been the target, which makes sense giving land loss is measured in acres, but expect to see ecosystem services migrate into the accounting. The goal in valuing the land building and protecting services provided by coastal wetlands is to spend public money wisely in an era of austerity. These metrics allow decision-makers to evaluate tradeoffs. Already in the master plan, the increase in certain ecosystem services like carbon sequestration were argued to outweigh and justify the decrease in other services, like shrimp habitat. Again, these were not yet $ valued. This time around, it certainly won't be emergy used to derive the value of these public goods. Instead, what we are seeing hints at is a move toward marketizing services. Instead of developing $ metrics to inform planning or to build new public institutions (via bonding a la Costanza), some important Louisiana decision-makers are turning to potential carbon and nutrient markets to help value (and pay for) wetland benefits. There's no need to do contingent valuation of a wetland function like carbon sequestration that is traded in California's cap and trade market at $10 a ton - that's the value right there.

Where does nature's value come from? In no small part, from those working to understand and protect Gulf Coast marshes. The practice of assigning the environment a dollar value continues to evolve and does so as practitioners – regulators, economists, scientists - engage with these ecosystems, providing certain opportunities and obstacles. Indeed, an ongoing question within the field is the role of environmental science and the extent to which ecologists can provide the kind of information about nature economists want and need to do valuation. The complexity of ecological functions - their nonlinearity, dynamsism, etc. - has long been acknowledged as a stumbling block, from Westman's prescient 1977 Science article to the Millenium Ecosystem Assessment to even the most ostensibly gung ho supporters of valuation, TEEB. These difficulties do not mean that the champions of the valuation of nature feel defeated. Just consider how Costanza felt in 1997, "….although ecosystem valuation is certainly difficult and fraught with uncertainties, one choice we do not have is whether or not to do it". Besides environmental economics' struggle with its existential dependence on externally produced knowledge, its practitioners struggle with understanding their own conditions for knowing nature's value. There's still much question about whether contingent valuation will work. We've seen a few here: people don't always act rationally, and they also reject the survey techniques researchers employ to come up with their numbers. This is setting aside what is perhaps the trickiest question, that of benefits transfer, or the practice of taking the monetary values for ecosystems in one part of the world and using them in a different part of the world. After all, as one scholar put it, "An acre of coastal salt marsh seaward of New Orleans is many times more valuable …than an acre of abandoned farm pasture in Nebraska” and it's being able to say how much more valuable and how locally specific to get that troubles many researchers. Finally, what kind of policy angle environmental economists ought to take is still open to debate (the riff between so-called environmental and ecological economists itself is a part of that). Is nature open for business and up for sale? Or is the goal simply better planning and perhaps $ numbers aren't needed? You can expect those questions to be asked if not resolved in any good paper today. Yet, as one group of historians of the ecosystem services paradigm notes, these uncertainties are not the growing pains we might expect from an emerging research perspective. As is clear when we look at the history of coastal marsh protection in the Gulf Coast, nature's valuers have had at least 40 years experience to figure things out. Instead, what lingering questions and simmering debates reflect are genuine obstacles to a rightly controversial practice.

In attempting to answer these questions and close these debates, how economists, regulators, and scientists go about valuing nature will evolve. This of course is happening globally. One only has to follow the Natural Capital Project around the world, from Colombia to British Colombia, to get a sense of the importance of these places to how the vision of nature as capital is being articulated and materialized. But Louisiana and the rest of the Gulf Coast will undoubetedly continue to be a sort of lab for experimenting on the policy, science, and economics behind the valuation of nature - the place where many of the important conversations ongoing about the future of conservation in the face of climate change are worked out. As a senior adviser to America's Wetland Foundation recently put it, “We can test it better than anyone.”