Thematic Report: Economic Valuation of Goods and Services
In order to carry out an effective TDA and to design a SAP that is likely to be approved, there is a need to have at least an approximation of the economic value of the goods and services of the water system. This is difficult, especially when it comes to considering the non-use values. However, the leverage points identified later during the TDA development process have to be based on an action that a government is prepared to finance.
Consequently, it would be beneficial if the TDA included a good economic analysis based on economic valuation of goods and services – although this will depend on the complexity of the project and the time and budget available. The thematic report should be a full analysis that is summarized in the TDA highlighting the most important findings. The report is valuable for reference in later stages of the project, particularly during SAP development as it creates a basis for sound decisions about the allocation of financial resources and allows for a more integrated decision-making approach than has commonly been the case to date. As an example of good practice, Box 7 presents a brief outline of the economic valuation approach used in the Yellow Sea LME.
Box 7: Economic valuation in The Yellow Sea LME – An Example of good practice
During the initial project development phase from 1996 to 1999, a framework Strategic Action Programme (SAP) was developed for the Yellow Sea LME that not only formed the basis for the GEF approval of the project but was also somewhat innovative in including a cost benefit analysis of the benefits of action compared with non-action. The challenge facing the SCS project in 1999 was that the only "ecosystem values" readily available were those of Costanza et al. (1997) that were based on global data and have subsequently been challenged on both economic and scientific grounds. The Project Steering Committee, composed solely of participating government representatives, in approving the draft SAP and the SCS GEF Project, insisted not only that the project activities include the revision of the SAP but also the determination of regionally applicable economic values for environmental goods and services.
Initially, the plan was for each national working group to review the economic data and information relating to their areas of expertise (mangroves, coral reefs, seagrass, wetlands, fisheries and landbased pollution) and to assemble data sets that would enable some form of regional analysis of values to be undertaken by the regional working groups. It became apparent by the end of 2002, that the national working groups contained specialists in the subject matter with few or no economists amongst the members. The Project Steering Committee therefore decided to establish a Regional Task Force on Economic Valuation (RTF-E) consisting of nine economists from the region charged with providing economic assistance and advice to the national and regional working groups addressing habitat, fisheries and pollution issues and determining “regionally applicable economic values for environmental goods and services”
A recent report on the economics of ecosystems and biodiversity for water and wetlands includes a chapter on improving measurement and assessment for better governance. This chapter offers a simple, step-wise approach that could be adapted to International Waters projects. An edited summary of the chapter is presented below.
Measurement and assessment for improved water governance
An understanding of the values and benefits that people derive from water systems should be central to the development and implementation of regional, national and international policies addressing these assets as well as specific management decisions for individual sites.
However, there has been a lack of consideration of the multiple values of water systems. The values of these ecosystems have seldom been adequately acknowledged or taken into account in policy making and decision making processes. This has been a contributing factor to the continuous loss and degradation of water-related ecosystems around the globe.
A focus on ecosystem services in the management of water systems can help identify opportunities for:
- Better harnessing and maintaining the multiple benefits that ecosystem services related to water provide
- Developing more cost effective strategies than conventional technical solutions can offer
- Avoiding costs related to the loss of biodiversity and ecosystem services
In order to unlock these potentials, it is necessary to recognise who benefits by how much from which ecosystem services and how this might improve with positive restoration and management activities - or risk being negatively affected by any ecosystem degradation.
Different approaches and tools can help assess the benefits that flow from water systems by providing different and complementary information, including qualitative, quantitative, spatial and monetary approaches. Given their relevance to demonstrating value, each of the elements is presented below.
- Qualitative analysis is based on non-numerical information, which describes values and benefits that are not easily translated into quantitative information (e.g. landscape beauty, impacts on security and wellbeing, cultural and spiritual values). For instance, determining which wetlands have particular cultural values to which communities is in itself an important means of communicating value.
- Quantitative data are used to represent the state of, and the changes in, the ecosystems and the services they provide using numerical units of measurement (e.g. groundwater availability in a watershed in cubic metres; nitrogen and phosphorus in a water body in micrograms per litre; carbon annually sequestered in peatlands in tonnes per hectare per year; number of people who benefit from access to clean water). The value of ecosystems can be demonstrated using physical stock and flow indicators as well as social indicators (e.g. proportion of households benefiting from access to clean water).
- Geospatial mapping allows the quantitative data to be linked with geographical information (e.g. which community benefits from clean water provision from a given water body). It can also be the basis of modelling the outcomes of alternative water management decisions in specific locations. This can be integrated into local accounting and decision-making tools.
- Monetary valuation can build on biophysical information on the services provided by ecosystems to derive values. The three most used categories of monetary valuation are:
- Monetary valuation methodologies based on markets: for example using market prices to value services not in the market (e.g. non-marketed fish, timber, water).
- Monetary valuation methodologies based on revealed preferences (e.g. using the Travel Cost method to estimate the value of a protected area through the amount of time and money people spend to visit it).
- Monetary valuation methodologies based on stated preferences: for example using Contingent Valuation, which is based on asking people’s willingness to pay for improved environmental protection (e.g. improved water quality) or to accept compensation for a reduction in the environmental quality.
In parallel to any assessments of ecosystem services using the approaches outlined above, a detailed stakeholder analysis should also be undertaken to ensure that ecosystem services are targeted that are of high priority for the different stakeholder categories. Participation can be important for both a provision of evidence (and hence quality of the analysis) and for the buy-in and acceptance of the decision (e.g. land use change, permits, investments, or payment for ecosystem services). This can help take into account qualitative indicators of importance and stakeholder preferences, thus complementing the quantitative and monetary indicators.
Understanding the values is only a first step in the process. Taking full account of these values requires a more integrated decision-making approach than has commonly been the case to date. Because of the significant economic benefits derived from water ecosystem services, there are consequences for many different decision makers. Hence there is a need for effective and integrated decision making. This will be discussed in more detail in the National and Regional Consultation Process Section.