Biodiversity. Clean water. Restored ecosystems. Flood reduction. These are all good things, and we can measure increases in them with physical units – number of different species, concentration of pollutants, acres restored, number of floods each year. So, then, why have economists written thousands of papers putting dollar values on environmental goods which are not traded in any marketplace?
Valuation of environmental goods has many uses, but it is particularly important for two specific kinds of decision making. First, major federal regulations have to pass a cost-benefit test; that helps us be sure that actions taken by the government help society more than they hurt. Companies are ready to tell regulators how much regulations will cost them. If the benefits include environmental improvements and we cannot place a value on those improvements, then we effectively place a value of zero on those environmental benefits in the cost-benefit analysis and bias the process against approving regulations that might yield great value through increasing environmental quality, bolstering species, and restoring habitat. Second, the Oil Pollution Act of 1990 and the Comprehensive Environmental Response, Compensation, and Liability Act (aka CERCLA, passed in 1980 and commonly known as the Superfund Act) allow polluters to be held liable for monetary damages associated with oil spills and toxic pollution. The threat of that liability gives firms efficient incentives to take precautions to avoid oil and chemical contamination. However, the only way to estimate those damages is by calculating the dollar value of reductions in non-market goods like recreation losses from oiled beaches, society’s harm from the birds, turtles, and other animals killed by oil spills, and human health effects from toxic contamination. When the damages can be in the billions of dollars, both the government and the responsible party have a stake in generating accurate estimates of the value.
Non-market good valuation is not my primary area of research, but I have teamed up on some studies to estimate values of goods in my primary area of research: species and habitat conservation and restoration.
Environmental improvements from stormwater management: Most research on conservation and restoration in economics focuses on terrestrial habitat. However, inshore aquatic habitats also provide important homes for species and vital services for people who live near them. A publication from the National Research Council highlighted how stormwater runoff patterns in urban areas degrade rivers and streams nearby, and how using green stormwater management infrastructure (rain gardens, cisterns, pervious concrete, etc.) instead of just conventional concrete storm sewers could improve stream quality and aquatic habitat quality in urban areas. Catalina Cadavid and I estimated the values people place on improvements that could result from deploying a more diverse mixture of stormwater management approaches in an urban area (Cadavid and Ando 2013). We found that households were willing to pay almost $40 every year to make streams clean enough to fish in and $35 every year to have improvements in stream flow and aquatic habitat, and households with basements would pay $35 every year to cut basement flooding in half. Even in a small urban area with 50,000 homes, these values imply that a green infrastructure initiative that curbed flooding and improved both water quality and stream flows could be valued at $3 million each year.
Grassland restoration: Back on land, grasslands are endangered ecosystems in the U.S. due to widespread conversion. Private and public wildlife groups and agencies have responded by restoring millions of acres of grasslands in the U.S., but we had no estimates of the value to society of those restorations. To fill that knowledge gap, Sahan Dissanayake and I used a choice experiment survey to estimate the value people place on grassland restoration and how that value depends on features of the area restored (Dissanayake and Ando 2014). We found that a single household could be willing to pay between $75 and $150 a year to have a 100-acre grassland restored near them. That value increases with bird biodiversity, bird population density, the number of endangered species present, and the prevalence of wildflowers, and decreases with the frequency of controlled burns used to manage the grassland and how far the area is from the household itself.
Biodiversity: Economists struggle to estimate the value of biodiversity because it can be difficult for people to grasp what is meant when they are asked what they would pay to increase an abstract measure of biodiversity. I worked with two teams of ecologists and economists on research to estimate the values of particular services that biodiversity provides.
First, in Hungate et al. (2017) we show that grasslands store more carbon if they have a more diverse array of plant species in them, helping to reduce one of the greenhouse gases that is contributing to climate change. We estimated the value of having an additional species in a grassland through its contribution to increased carbon storage. Adding a single additional plant species to a grassland with only one kind of grass increases carbon storage on one hectare by 9 metric tons, and reduces damages to society from carbon emissions by over $800. To extrapolate to a policy scale, we found that adding a species to the 12 million hectares of grasslands currently in the Conservation Reserve Program would have $700 million of benefits.
Second, Letourneau et al. (2015) study the value of increased biodiversity in crop lands when diversity alters the effectiveness of biological pest control. We used data on cucumber and squash crops in the Southeastern U.S. we found that some losses in the diversity of natural enemies to crop pests could cost between $1.5 and $12 million in social surplus every year. Note that our study area produced less than a quarter of those two crops, and those two vegetables are only about 4% of the value of fresh vegetable production in the U.S., so the value of natural enemy diversity as an asset for vegetable production as a whole could be many times larger. However, we found some cases in which adding species actually reduced the effectiveness of pest control and generates costs instead of benefits; sometimes the value of an additional species depends on exactly how the resulting community interacts.
Ongoing research here in Mumford Hall is estimating more elements of the value of nature: beaches in a major city, a national park, and fish diversity in a river affected by agricultural pollution. The process of understanding how humans benefit from the environment (and how much those benefits are worth) is a long path with many steps in it. Tune in for updates on the next steps.
Cadavid, C. and A.W. Ando. 2013. “Valuing Preferences over Stormwater Management Outcomes Given State-Dependent Preferences and Heterogeneous Status Quo.” Water Resources Research 49(7): 4114–4125. DOI: 10.1002/wrcr.20317.
Hungate, Bruce A., Edward B. Barbier, Amy W. Ando, Samuel P. Marks, Peter B. Reich, Natasja van Gestel, G. David Tilman, Johannes M.H. Knops, David U. Hooper, Bradley J. Butterfield, Bradley J. Cardinale. 2017. “The economic value of grassland species for carbon storage.” Science Advances 3(4): e1601880. DOI: 10.1126/sciadv.1601880.
Letourneau, D., A.W. Ando, A. Narwani, J. Jedlicka, and E. Barbier. 2015. “Simple-but-Sound Methods for Estimating the Value of Changes in Biodiversity for Biological Pest Control in Agriculture.” Ecological Economics 120: 215-225. DOI: 10.1016/j.ecolecon.2015.10.015.