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Thread: The free market and ecosystem services

  1. #1
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    09 Oct 10

    The free market and ecosystem services

    It's an old debate and one that isn't going anywhere. It already has influenced environmental law regarding pollution. The argument regarding the limitations of the free-market to account for externalities, many of them attributable to services provided by living and non-living elements of our environment. I see it as the main constraint that must be placed on the free-market, not one that seeks to destroy the conceptual heart of it, but something that is necessary due to the clear limitations that a free-market has of placing an accurate value on the cost of producing most products.

    Many of the services provided by natural systems cannot actually be replaced in practice. Many have values that are not necessarily monetary in nature. Nevertheless, they still possess a clear monetary component and we should be attempting to estimate them. Costanza et al. published a watershed paper in 1998 that attempts to place a ranged estimate on a selection of ecosystem services on a global level. This paper has proven significant in stimulating debate on the matter and their subsequent analysis of the monetary value of New Jersey's ecosystem services has accumulated over 12,000 academic references Granted, they could all be negative, but nevertheless, the subject matter has proved influential.

    The definition of ecosystem services has shifted over time, but common sense should allows us to identity generally what they are.

    -Ecosystem Services are the conditions and processes through which natural ecosystems, and the species that make them up, sustain and fulfil human life—Daily (1997).

    -Ecosystem Services are the benefits human populations derive, directly or indirectly, from ecosystem functions—Costanza et al. (1997).

    -Ecosystem Services are the benefits people obtain from ecosystems—WRI 2005.

    -Ecosystem Services are components of nature, directly enjoyed, consumed, or used to yield human well-being—Boyd and Banzhaf (2007).

    -Ecosystem Services are the aspects of ecosystems utilised (actively or passively) to produce human well-being— Fisher et al. (2009).

    -Ecosystem Services are the direct and indirect contributions of ecosystems to human well-being—TEEB Foundations (2010).
    The ecosystem services agenda:bridging the worlds of natural science and economics, conservation and development, and public and private policy

    Costanza's paper is ambitious to say the least, but just because its incredibly difficult, doesn't mean we shouldn't be trying to do it. As they state...
    we can do them with an explicit acknowledgement of the huge uncertainties involved or not...
    Their overall conclusion is
    The services of ecological systems and the natural capital stocks that produce them are critical to the functioning of the Earth’s life-support system. They contribute to human welfare, both directly and indirectly, and therefore represent part of the total economic value of the planet. We have estimated the current economic value of 17 ecosystem services for 16 biomes, based on published studies and a few original calculations. For the entire biosphere, the value (most of which is outside the market) is estimated to be in the range of US$16–54 trillion (1012) per year, with an average of US$33 trillion per year. Because of the nature of the uncertainties, this must be considered a minimum estimate. Global gross national product total is around US$18 trillion per year.
    and readily established the importance of all states for managing these services if only for purely economic value. It is not implied that man's industrial actions are on a path of destruction of these services, merely that their is a conceptual requirement to recognise that these services need to be managed, and ask the question to what extent can the free market properly value them.

    Many of the valuation techniques used in the studies covered in our synthesis are based, either directly or indirectly, on attempts to estimate the ‘willingness-to-pay’ of individuals for ecosystem services.... In this study we have tried to estimate the total value of ecological services, regardless of whether they are currently marketed.
    As we have noted, the value of many types of natural capital and ecosystem services may not be easily traceable through well functioning markets, or may not show up in markets at all...Enhanced wetlands quality may improve waste treatment, saving on potential treatment costs. For example, tertiary treatment by wetlands may save $100 in alternative treatment. Existing treatment may cost only $30. The treatment cost savings does not show up in any market. There is very little relation between the value of services and observable current spending behaviour in many cases...
    A large part of the contributions to human welfare by ecosystem services are of a purely public goods nature. They accrue directly to humans without passing through the money economy at all. In many cases people are not even aware of them. Examples include clean air and water, soil formation, climate regulation, waste treatment, aesthetic values and good health...
    The latter quote is especially important. Take air pollution in China for example. Some studies have indicated a massive cost to the chinese economy is occurring as a result. The matter is complex, does China really accumulate significant costs in its health system or is it avoided as many people are simply not treated. To what extent do the gains by not regulating pollution outweigh those necessary to do so, in purely economic terms for the average chinese citizen. The matter becomes infinitely more complex if you introduce ethical concepts of human health and welfare that trump monetary value or refuse to value in economic terms the health of a human being.

    American environmental law has posed libertarian values, espousing the principle that harm cannot be placed on a person from another. This is not an evaluation placed on economics and although that is the purpose of this thread, the fate of environmental law and decision making should not solely rest on such a valuation.
    In many cases the values are based on the current willingness-to pay of individuals for ecosystem services, even though these individuals may be ill-informed and their preferences may not adequately incorporate social fairness, ecological sustainability and other important goals. In other words, if we actually lived in a world that was ecologically sustainable, socially fair and where everyone had perfect knowledge of their connection to ecosystem services, both market prices and surveys of willingness-to-pay would yield very different results than they currently do, and the value of ecosystem services would probably increase.
    Because ecosystem services are largely outside the market and uncertain, they are too often ignored or undervalued, leading to the error of constructing projects whose social costs far outweight their benefits.
    And here is where placing a valuation on ecosystem services will play a role.

    I remember reading about the severe floods in Pakistan in 2010, following significant monsoon rains. Many experts attributed the severity of the flooding in part to the mass deforestation that had occurred upriver along the floodplains over the decades, leading to greater run-off in a rapid period. Much of the deforestation was done illegally, some allegedly to fund the activities of the Taliban, so strictly this was not a matter of a free-market evaluation of the cutting down much of the forestry, but the concept can be applied elsewhere. Analysing the issue in purely economic terms, did the gain in selling the wood outweigh the additional damage suffered in flooding downstream. The cost will surely re-occur. The long standing example of managing forestry by replanting is a nice example of containing the free-market, you can cut them down, as long as you re-plant. Specific guidelines that constrain private enterprise.

    The question becomes, how do we crunch the numbers, where will it lead us moving forward in estimating the true cost in producing a product, who should bare these costs? If scientists improve in their ability to generate real data on these matters, the natural consequence on economic grounds may be a tightening of the free-market in unexpected ways.
    Last edited by tantalus; 08 Jan 15, at 00:28.

  2. #2
    Senior Contributor Monash's Avatar
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    01 Mar 10
    Struggling with the math but here is an interesting diagram and set of equations that introduces classical physics into the standard economic equation which that Output (Y) is a factor of Labor (L) + Capital (K) while totally ignoring another important input. The diagram at least expresses it simply enough and since energy has to be extracted from the environment ...

    How energy conversion drives economic growth far from the equilibrium of neoclassical economics - IOPscience

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