Putting a Price Tag on Nature

The contributors to Nature’s Services, who include many of the nation’s leading natural scientists, have taken on the enormous tasks of, first, characterizing the ways in which Earth’s natural ecosystems confer benefits on humanity and, second, making a preliminary assessment of their value. They do a fine job of accomplishing the first but make a mishmash of the second.

Most of the individual contributions to Nature’s Services catalog and describe the services provided by some part of the natural world, how mankind relies on that subsystem or service, and what the human population is doing to degrade or threaten the very service on which it relies. The picture that emerges is one of a marvelously complex, interwoven, and perhaps fragile biogeochemical dance that supports life.

Some of the chapters focus on the overarching services provided by natural systems. For example, in their review of the ecosystem services supplied by soil, Gretchen Daily, Pamela Matson, and Peter Vitousek start by describing the complex process of soil formation and the importance of soil in retaining nutrients and providing physical support for plants. Gary Paul Nabhan and Steven Buchmann draw a complex portrait of the pollination process and make clear the potential consequences of the decline of key pollinators such as wild and captive honeybees. Other chapters examine the range of services provided by major biomes, including marine and freshwater ecosystems and forests. And some chapters give case studies. For example, Andrew Wilcox and John Harte focus on a specific place-Gunnison County, Colorado-and the ecosystem services on which the county relies.

A variety of preliminary assessments of the values of ecosystem services are made. For example, Daily, Matson, and Vitousek estimate the value of key soil functions to crops at $850,000 per hectare, or the cost of modern hydroponic systems in the United States. They also estimate the total value of natural nitrogen fertilization on all land at $320 billion per year, which is based on the cost of artificially supplying nitrogen fertilizer for all land plants after subtracting the amount supplied anthropogenically.

Flawed analysis

Unfortunately, the book encounters serious difficulties as it moves from description to analysis. Although the chapter by Larry Gould and Donald Kennedy does a fine job in laying out the economic principles that could help establish a meaningful basis for the valuation of natural services, most of the other authors write as if they hadn’t read it.

One of the most confusing aspects of the book is the absence of a baseline for the analysis. Daily’s introductory chapter challenges the reader to imagine a colonization of the Moon and all of the natural systems that would have to be transplanted or otherwise imitated. This suggests that the baseline against which comparisons will be made for the “total value” calculations is total loss of ecosystem services. Indeed, the chapter on soil, Norman Myers’ chapter on forests, and the chapter by Sandra Postel and Stephen Carpenter on freshwater ecosystems seem to adopt this approach. Although the premise at least is clear, the result is not particularly interesting: After all, the complete loss of any one of those services/ecosystems could lead to the demise of humanity, with an implicit infinite cost.

In other chapters, the authors apparently prefer a big number to the biggest number, so they each offer estimates that are significant percentages of gross world product but far short of infinite. In effect, they adopt some other baseline against which to compare the value of present services but fail to identify that baseline. In fairness, not all of the authors fall prey to this floating baseline trap. Nabhan and Buchman clearly state that their assessment of the value of pollination services by animals is derived “by comparing the yield (loss) of the crop in the absence of these animals with the yield in the presence of the pollinators.”

A second key problem is that the book largely fails to focus on the crucial issue of marginal rather than total costs, despite Daily’s admonition in her introductory chapter. “As a whole ecosystem services have infinite use value because human life could not be sustained without them,” she writes. “The evaluation of the tradeoffs currently facing society, however, requires estimating the marginal value of ecosystem services (the value yielded by an additional unit of service, all else held constant) to determine the costs of losing-or benefits of preserving-a given amount or quality of service.”

Why, then, is this message often ignored throughout the balance of the book? One can imagine at least two reasons. First, the siren call of large numbers is too powerful to ignore, especially to those who may have a political agenda. The estimate by Osvaldo Sala and José Paruela that conversion of lightly grazed pastureland into cropland causes release of carbon dioxide potentially valued at $200 per hectare simply does not have the pyrotechnic power of Rosamond Naylor and Paul Ehrlich’s claim that in the absence of natural pest control services the entire market value of crops, $1.4 trillion, would be lost.

Marginal value also gets short shrift because the authors simply do not seem to understand the concept. For example, after providing estimates of the total potential value of natural pest control, Naylor and Ehrlich state that “[c]alculating the marginal cost is virtually impossible, however, due to the difficulty in identifying a baseline and measuring a unit change in the natural pest control service.” But this reasonable statement begs the question of how to measure total value without first identifying a baseline and measuring marginal value. The authors then point out that in the case of the brown planthopper in Indonesia, reducing pesticide use and reestablishing natural pest control led to more than $1 billion in benefits. “Based on the magnitude of this result,” they conclude, “one can only project that replacing pesticides with natural pest controls on a global scale would lead to marginal benefits in the tens of billions of dollars annually.” This statement is nonsense; the units simply do not make sense. Marginal benefits are expressed in “dollars per unit of change.” A crude measure of marginal benefits associated with pest management might be dollars saved per one-ton decrease in pesticide use. Clearly, the attempt to scale up from a specific case to estimate global marginal benefits is meaningless.

Mistaking costs for values

In many cases, the authors also mistake the cost of replacing a service or avoiding its loss for the value of the service itself. For certain applications this is appropriate, particularly when the services are essential. However, it is also possible that if certain natural services were lost, they would not be fully replaced. For example, the fact that it might cost $250 billion annually to offset net biosphere carbon emissions does not mean that it is worth doing that, as assumed by Susan Alexander, Stephen Schneider, and Kalen Lagerquist. And the fact that it might cost $320 billion per year to artificially fertilize all land plants if all nitrogen cycling services were suddenly lost, does not imply that we would choose to do so, as implied by Daily, Matson, and Vitousek.

A similar mistake made throughout the book is the confusion of the economic impact of an activity with the social value of the opportunity for that activity. For example, Postel and Carpenter state that the “economic output” of freshwater fishing in 1991 in the United States was approximately $46 billion, an estimate based on total spending on equipment, travel, and intermediate services. But $46 billion is the cost of taking advantage of the fishing opportunity, not the value of the opportunity itself. Conceptually, the latter figure would be the difference between the total value individuals derive from fishing, less the cost of availing themselves of the opportunity. Hence, the higher the expenditure on the sport, the lower the actual net value derived. The $46 billion figure is actually a transfer payment that compensates service providers for the cost of providing the service. In a perfectly competitive economy, it can be used as an estimate of the cost of supplying the service, but it is not an indicator of the value of the ecosystem service. Similar mistakes are made by Postel and Carpenter with respect to freshwater transportation services and by Charles Peterson and Jane Lubchenco on employment loss related to overfishing of marine ecosystems.

Throughout the book, I had the uneasy feeling that some serious double counting was used. For example, the chapters on pollination, pest control, soil, and water services all seemed to claim that the loss of that service would lead to a complete loss of agricultural production, which is undoubtedly true. However, agricultural production can be lost only once, so to the extent that the chapters rely on total value calculations to accomplish their impact, there is the danger that, taken together, they overreach.

The difficulty here is that there is no integrating framework that allows for what economists call “general equilibrium” effects. This is the idea that a change in one part of the economy (ecosystem) can have direct effects that are easily observable as well as equally important indirect effects in other sectors of the economy (ecosystem). The other side of the general equilibrium coin is that when multiple changes occur simultaneously, a given benefit can be lost only once. Daily recognizes this problem in her concluding chapter, where, to her credit, she resists what must have been a powerful temptation to simply sum up the values estimated in the various chapters to arrive at an estimate of the total value of all ecosystem services..

The potential impact of the book was also dulled by a number of minor but easily avoided problems. For example, in estimating the value of carbon accumulation in grassland soils over 50 years, Sala and Paruelo fail to discount future benefits. In discussing the costs of water rights, Postel and Carpenter do not clearly distinguish annual from one-time benefits of water flows. Daily, Matson, and Vitousek badly misuse the term “existence value,” first introduced in the book by Goulder and Kennedy.

None of the mistakes in Nature’s Services are so egregious as to undo the significant good that the book accomplishes. However, they do suggest that a social scientist, particularly an economist, was not integrally involved in coordinating and editing the volume. This is a problem for a project that claims to be based on the work of a “broad, interdisciplinary group of natural and social scientists.”