Pam Matson, Department of Geological and Environmental Sciences, Stanford University, describes how we value ecosystem services. (1:34 min)

How do economists and environmental scientists calculate the value of the products and services provided by a natural resource? Think about the services provided by a large freshwater or saltwater wetland, perhaps one near you. Many types of fish spawn in wetlands and the young fish spend the beginning of their lives there. The annual worldwide fish catch is about 100 million tons and is worth $50-100 billion. That wetland may help contribute to this very lucrative commodity. What dollar value would you put on your local wetland's contribution to the global fish catch? The fish from freshwater sportfishing in the United States alone may be worth as much as $16 billion. Another $46 billion is generated employing people associated with that sportfishing industry. So, in addition to providing a nursery area for the fish you eat, a local wetland may indirectly employ someone in your community. But that isn't all a wetland provides. Flood control; water treatment and purification; nutrient cycling; wildlife habitat for hunting, viewing and photography; or other recreational opportunities, like boating and hiking, are on the shortlist of wetland amenities and services.

There are basically three categories of services and benefits, with some easier to price than others. Products, like fish or timber, are fairly easy to quantify, compared with services like nutrient cycling or water purification. Even harder to grasp in terms of economic value are the recreational, aesthetic and spiritual benefits humans gain from the natural world.

A study by the US Army Corps of Engineers reveals a wide variety of methods for valuing wetlands, as well as vastly differing values. With so many methods, it becomes difficult to compare among studies. As you can imagine, these wide-ranging numbers make it hard for decision-makers to apply a value to their local wetland. Nationwide, product values from fish, shrimp, oysters and furs ranged from $.30/acre to $37.46/acre. Based on the price that public agencies paid for wetland preservation, the value of wetlands preserved for wildlife was estimated at $1,200/acre, and high-quality wetland open space was valued at $5,000/acre. A cost analysis of a federal wetland reserve program, which pays to convert cropland back to wetland, revealed easement payments of $105-$639/acre. Money spent on restoration that aims to improve ecosystem functioning was lower, from $89-$139/acre. Contingent valuation, where people are surveyed on their willingness to pay, revealed wetland users in coastal Louisiana were willing to pay $1,911 per year for use of the regional wetland. On the other hand, local residents living near a wetland in Kentucky were willing to pay only $6.31-$12.67 per household to preserve the wetland. A survey of hunters along the Pacific Flyway indicated they valued each duck taken at $3.29 and each pothole, where ducks live, was worth $8.88.

The following brief descriptions of several methods of valuing nature offer just a glimpse of these complicated calculations. More detailed explanations can be found at Ecosystem Valuation, (www.ecosystemvaluation.org), a website supported by the US Department of Agriculture, Natural Resources Conservation Service (USDA, NRCS) and the National Oceanic and Atmospheric Administration (NOAA).

	Discussion
	How would you place a price tag on nature?

Direct, consumptive use values apply to products from natural ecosystems that are harvested and sold commercially, such as fish or lumber. Direct, nonconsumptive use values also are fairly easy to understand, but a bit harder to calculate. The benefits of bird watching, hiking and sightseeing can be calculated, based on how much it costs to travel to the accommodating habitats. For example, an Alaskan wilderness area directly benefits the residents and tourists who enjoy hiking and photography, although they leave with no products to sell. The local economy also benefits, as people dine in restaurants, stay in hotels, purchase equipment and souvenirs and fuel their cars. Indirect value can also be assigned to that Alaskan wilderness area if other people enjoy watching a television show about the area and its wildlife.

The contingency method is useful when it's difficult to assign figures, because it surveys people on their "willingness to pay" for specified resources or ecosystem functions. Pennsylvania residents, for example, may be willing to pay a few cents per acre per year in taxes or private contributions to a nonprofit organization to help preserve that Alaskan wilderness area. "Willingness to pay" is subjective, however, with results depending on the concerns of the people surveyed, their proximity to the ecological service, their understanding of that service and their personal ethics. Placing a price tag on non-use values is even more difficult. Many people say they are willing to pay for the possibility of visiting a habitat, the sheer existence of a resource or to ensure the resource's existence for future generations. The Alaskan wilderness may be worth funding for people who consider wild open spaces, polar bears and migrating herds of caribou important, but will never travel to Alaska. Survey approaches are often the only way to ascertain non-use values, although many experts note that surveys can provide questionable results. Still, researchers and managers view the results as at least a gauge for valuing a natural resource.

Replacement costs, like calculating the cost of preserving land in the New York City watershed versus building a filtration plant, make easy comparisons, but only tell part of the story. Avoided costs are estimates of how much money would be spent if services had to be purchased. The value of natural pest control, pollination, flood control, soil fertilization and water filtration are hard to calculate, because actual expenditures are avoided if the natural ecological services are intact and functioning properly. As a result, the risk and degree of a malfunctioning natural service and the projected cost of a technological fix must be estimated. The Hedonic property value method uses the prices of residential property to reveal the value of local environmental attributes. This method is limited to environmental services that are located near residential areas. Property values tend to increase if they're located near a lake or urban water amenity, or if the water quality of streams and lakes improves locally. Homeowners appear to place a value on at least the aesthetics of a wetland, although some homeowners also probably appreciate the flood control and water quality benefits of wetlands.

The traditional valuation techniques described above attempt to assign value to nature and its services. Jim Salzman, a professor at Washington College of Law, American University, notes that although these methods provide a common currency to measure nature's worth, they fail to capture the true value of ecosystems services. In addition, many of these valuation techniques also are expensive to calculate. They may require extensive survey development, questionnaire distribution, and follow-up. Much research must be done to calculate all of the variables associated with natural resource use, risk assessment, and projections of technological solutions. Indicator-based valuation tools can be less expensive and may require less time to develop and apply. These tools depend on ranking or prioritizing expected benefits of investments in the environment. The Environmental Protection Agency (EPA) estimates that, in 1997, the US spent $210 billion complying with federal environmental regulations. Although this figure is subject to discussion and doesn't include state and local funding for restoration and conservation, it's apparent that substantial amounts of public money are spent to protect our natural services. Resource managers can use indicator-based valuation tools to decide where to most efficiently spend environmental protection dollars and where restoration might be most effective.

How much is biodiversity worth?
The value of biodiversity is a good example of just how difficult placing a price tag on ecological services can be. Many environmentalists and experts use "biodiversity prospecting" as a significant reason for saving the world's rain forests. Tropical rain forests harbor the greatest biological diversity of species and ecosystems. Diversity of species, in turn, houses an immense variety of genes. Since 25 percent of prescription medicines contain active ingredients derived from plants, it's likely that the diversity of plants in a tropical rain forest will continue to offer new cures. As the use of biotechnology escalates, genes to improve agricultural, industrial and pharmaceutical products will continue to be harvested from plants and animals. It seems reasonable to think biodiversity should carry a hefty price tag. But, R. David Simpson, a researcher for Resources for the Future, a non-partisan environmental think-tank, considers the contribution of biodiversity on the economic margin. Although there is no substitute for biodiversity as a whole, nature tends to create redundancy, so the benefits from saving an individual species or local habitat may be small. In the end, from an economic viewpoint, pharmaceutical companies show little willingness to pay to preserve tropical rain forests worldwide.

Simpson points out, however, that biodiversity is important for a number of commercial, ecological, aesthetic, ethical and even spiritual reasons. Biodiversity prospecting simply may not have the economic pull needed to justify fully funding rain forest conservation. In the future, conservationists will need to look for other angles to preserve tropical rain forests, such as payment for local water purification services or international transfers from concerned conservationists worldwide.

Nature as currency
As an example of why currencies matter when referring to valuing ecosystem services, consider wetlands mitigation banking. This policy permits developers,

	Thinking Point
	Why do you think it is so much harder to assign monetary values to ecosystem services than to services provided by humans or technology?

once they have taken steps to avoid and minimize wetland loss, to compensate for wetlands that will be destroyed through development by ensuring the restoration of wetlands in another location. The regulations mandate trades that ensure equivalent value and function between the destroyed and restored wetlands. In practice, however, most trades are valued in units of acreage. Within very loose guidelines, trades between productive (though soon to be destroyed) wetlands and restored wetlands are approved on an acre-for-acre basis. More sophisticated banks require ratios, trading development on one acre of productive wetlands for, say, restoring four or five acres of wetlands somewhere else. Counting acres may make for easy accounting, but it's poor policy.

Why? The social value of the habitat is absent from the transaction. The ecosystem services provided by the wetlands--positive externalities such as water purification, groundwater recharge, and flood control--are largely ignored. Opinions may differ over the value of a wetland's scenic vista, but they are in universal accord over the contributions of clean water and flood control to social welfare. Trading acres for acres provides an inadequate measure to capture what's really being traded of significance. To be sure, such a simple metric allows trades, but other important, unaccounted tradeoffs are occurring. The program can suffer from a lack of accountability (or, more accurately, a lack of countability).

To achieve the optimal outcome from environmental trading markets, we need to understand and account much better for the qualities being traded. To do so requires careful consideration of the measure of exchange--the currency--since in the final analysis the currency forms the very basis of the transaction. The trading currency superficially makes the commodities fungible (exchangeable), determining what is being traded and, therefore, protected.

Indeed, focusing on three aspects of currency reveals a great deal about a trading program's structure and success in promoting social welfare.

Currency adequacy concerns selection of the currency unit. Can the metric capture the significant values exchanged or do some important features remain external to the trades? In part because of cost and in part because of technical difficulty, in practice most currencies remain crude--that is, unable to account for important nonfungibilities across space, type and time.

Exchange adequacy addresses construction of the exchange market. In the face of a currency that fails to capture significant values, how can the market be structured to ensure trades support environmental protection? In practice, regulators use exchange restrictions to compensate for inadequate currencies. Crude currencies will result in tightly constrained trading schemes if the market maker desires to restrict environmental externalities. As with currency adequacy, however, equally strong pressures counsel loosening of trading restrictions.

Review adequacy addresses the institutional mechanisms for reviewing trades. If, in practice, neither currency nor exchange adequacy will often be achieved, then even trades of nonfungible commodities that fully comply with the trading program's rules will occasionally, perhaps systematically, fail to increase social welfare. When currency and exchange adequacy are not ensured, the model of exchange transforms from a commodity market to a barter market, from anonymous trading of generic commodities to individuals haggling over goods and services with unique attributes. In this setting, to what extent should we be willing to let owners of nonfungible environmental features strike deals which the rest of us cannot evaluate through any common medium of exchange and which many of us might not strike? Put more generally, who should determine the equivalency of such trades?