ecosystem services – rbouvier consulting

Fourth quarter 2021 and first quarter 2022 journal roundup!

By Rachel Bouvier | April 13, 2022 | Comments 0 Comment

This quarter, I focus on three recently published articles that highlight the value of environmental goods and services: regulations to combat the emerald ash borer, the value of agricultural land, and the value of wetland restoration.

Hope, Emily; McKenney, Daniel; Pedlar, John; Lawrence, Kevin; MacDonald, Heather. 2021. “Canadian efforts to slow the spread of Emerald Ash Borer (Agrilus planipennis Fairmaire) are economically efficient.” Ecological Economics, vol. 188.

“Emerald ash borer” by NatureServe is marked with CC BY-NC 2.0, via Openverse.

The emerald ash borer is an invasive insect that kills most species of ash tree. Managing the spread of the pest can be very expensive, with inconsistent results. The United States Department of Agriculture has actually removed federal regulations designed to slow the spread of the emerald ash borer, citing the high costs and the uncertain benefits. Canadian agencies have likewise been attempting to determine whether the benefits of regulation exceed the cost. The authors developed a model simulating the spread of the emerald ash borer under various conditions, and then modeled the likely effect of different regulations on that spread. Finally, they determined the economic impact of the emerald ash borer by calculating the cost of removing trees in urban areas and replacing 50% of them. (They did not model the cost of insecticide application due to the complexity of modeling such application at a national level.) For rural areas, the authors calculated the cost of the emerald ash borer by using the stumpage value of the trees.

Regulations designed to slow the spread of the emerald ash borer include limitations on transporting products containing wood from ash trees, treatments for products that are transported, and periodic audits. As the “true” efficacy of the regulations is unknown, the authors modeled the regulations at varying levels of efficacy. Finally, they then determined the net present value of the regulations. Results demonstrate that, even if regulations are only 25% effective at slowing the spread of the emerald ash borer, benefits outweigh the costs. This is the case even though the authors did not include the economic value of a healthy forest. If that were included, the benefits of those regulations would likely be much larger.

Agricultural landscape certification as a market-driven tool to reward the provisioning of cultural ecosystem services

Borrello, M.; Cecchini, L.; Vecchio, R.; Caracciolo, F.; Cembalo, L.; Torquati, B. 2022. Ecological Economics vol 193.

“File:Bessac 16 Polyculture 2013.jpg” by JLPC is marked with CC BY-SA 3.0.

One of the primary difficulties that agricultural landowners face is the high cost of keeping their land in agriculture, relative to other land uses. And yet, agricultural land provides benefits to society beyond just the value of the food produced on that land. It is a classic example of an environmental externality. This article examines the potential of issuing a “traditional agricultural landscape certification” for the preservation of olive groves in Italy. They found that such a certification commanded a price premium in the market, indicating that the cost to farmers of keeping their land in agriculture could be partially rewarded through the market.

Richardson, M.; Liu, P.; Eggleton, M. 2022. “Valuation of Wetland Restoration: Evidence from the Housing Market in Arkansas,” Environmental and Resource Economics 81:649–683.

“Planting live stakes in standing water” by WSDOT is marked with CC BY-NC-ND 2.0.

Continuing with the theme of valuing environmental goods and services, this article examined the value of wetland restoration (through the Wetland Reserve Program) by looking at the housing market in Arkansas. This article adds to the literature on the economic value of wetlands by looking at temporal variations in the housing market relative to the starting and ending date of wetland restoration projects. Therefore, rather than looking at the value of an already existing wetland, this article examines how improvements in wetland quality could impact surrounding property values. Their research finds a substantial increase in property values – an average of 6 to 10%! They also find that the wetland size and type were likely to influence the magnitude of the effect, with forested wetlands having a larger positive impact on housing values than pond, lake, or emergent wetlands. Interestingly, open water wetlands had a much smaller effect than non-open water wetlands. The reasons why are unclear.

Infrastructure: It’s more than roads and bridges

By Rachel Bouvier | November 22, 2021 | Comments 0 Comment

John Buie, CC BY 2.0 https://creativecommons.org/licenses/by/2.0, via Wikimedia Commons

Infrastructure seems to be the word of the hour. With Democrats and Republicans having spent a good portion of the year wrangling over the size and scope of the infrastructure plan, it seems that everyone is talking about it. But we at rbouvier consulting have a slightly different perspective on what the term “infrastructure” includes.

Most people think about infrastructure from a physical or manufactured perspective: roads, bridges, transportation systems, and the like. From an economist’s standpoint, infrastructure also includes the necessities of a well-functioning market: clearly defined private property rights, a robust and transparent legal system, a structure to support the flow of information, and even trust among market participants.

Environmental and natural resource economists expand the definition of infrastructure to include natural capital: assets provided by nature that support and provide ecosystem services: carbon sequestration, soil stabilization, natural flood control, water filtration, and the like. Just like manufactured infrastructure, natural infrastructure provides the underpinnings of a well-functioning economy. Even more so than manufactured infrastructure, natural infrastructure is almost invisible, only coming to our attention when it fails.

Part of this is because of the “public good” nature of infrastructure. Much infrastructure (though not all) is characterized by two qualities: non-excludability and non-rivalness. Non-excludability means that once the good is provided, it is very difficult to “exclude” others from partaking of that good. Non-rivalness means that once the good is provided, one more user can enjoy the good without affecting others’ use of the good. The difficulty here is that private companies have no incentive to provide goods with such characteristics. You cannot use the price to exclude people from participating in the good, and one more user does not affect others’ use of the good, both of which destroy the profit motive. That is why many public goods are provided by the government – think national defense, or the national highway system. (The highway system can be thought of as a congestible good: non-rival up to a certain point. Most goods run on a spectrum from pure private goods to pure public goods.)

Natural infrastructure faces a double whammy: not only is most natural infrastructure characterized by non-rivalness and non-exclusivity, it is also seen as freely provided by nature. In our market-based society, things that are seen as freely available are also likely undervalued. In turn, things that are undervalued are not well managed. Just like physical infrastructure, natural infrastructure can be degraded or even destroyed. But by taking account of the services provided by natural infrastructure, we can make better decisions that will improve the functioning of our economy, and save us a little money at the same time.

Infrastructure can be roughly divided into two types: green infrastructure and gray infrastructure. Green infrastructure is what I have been referring to as natural infrastructure, while gray infrastructure is manufactured infrastructure. In many cases, natural infrastructure can provide the same service as gray infrastructure, while providing other environmental benefits and avoiding environmental costs.

Think about flood control. Part of the reason why recent hurricanes have become more economically costly in the past few decades is because the natural wetlands – the marshy interface between the ocean and the land – had been destroyed or degraded. Recently, there has been a lot of interest in restoring wetlands to protect property from storm surges that come from hurricanes or other storms. Not only would restoring those wetlands provide flood control services, but they also could provide other ecosystem services in the form of habitat for aquatic creatures and other sea life.

Or, take stormwater filtration. One of the recent projects that we are working on here at rbouvier consulting is about nutrient pollution: excess nitrogen and phosphorus pollution from farms and urban runoff. Excess nutrients in water bodies can cause hypoxia, or “dead zones,” where algae growth from too many nutrients can lead to depleted oxygen levels in water. Some states are allowing municipalities to receive “credits” for nutrient pollution reduction by restoring formerly degraded wetlands, which allows those wetlands to trap and filter out pollutants before they reach the river, ocean, or bay.

Finally, some drinking water utilities are purchasing forested land in their watershed. By investing in this natural capital, water utilities may be able save on expensive filtration processes through the forests’ natural filtration services.

Green infrastructure is not always a substitute for gray infrastructure; in many cases, it can be a complement to it. Regardless, the infrastructure bill that emerges from Congress should pay attention to both kinds of infrastructure: green and gray.

Waters of the United States: What’s economics got to do with it?

By Rachel Bouvier | August 18, 2017 | Comments 2 comments

On June 27, 2017, the Environmental Protection Agency proposed a rule that would change the definition of the Waters of the United States (WOTUS). On whose advice did they do this? Why, economists’, of course!

Huh?

Let me back up. In 2015, then-President Obama issued a document redefining which rivers, streams, lakes and marshes fell under the jurisdiction of the EPA and the Army Corps of Engineers. This rule has come to be known as the Waters of the United States rule.

Non-policy wonks can be forgiven for wondering: 1. how a government can redefine what comprises that waters of the US, and 2. why the move would be so controversial.

The 2015 rule (which was never actually implemented, as it was stayed by the U.S. Court of Appeals for the 6th Circuit) was called by then-speaker of the House of Representatives John Boehner as “a raw and tyrannical power grab that will crush jobs… and places landowners, small business, farmers, and manufacturers on a road to a regulatory and economic hell.” A pretty strong statement.

What the 2015 rule would have done was to clarify (or extend, depending upon your point of view) exactly which waterways the EPA and the Corps can oversee under the Clean Water Act. Prior to 2015, the Clean Water Act covered only “navigable waters,” such as large lakes and rivers but did not necessarily include tributaries, wetlands, or smaller streams. The rule of 2015 expanded that definition to include protections for tributaries that may or may not run all year round, such as small streams and wetlands.

But why did economists get involved? Every proposed rule by the Executive Office must undergo a benefit-cost analysis, demonstrating that the benefits of the proposed rule outweighs the costs. Bill Clinton first imposed this test in the 1990s, to protect against overbearing regulations. Leaving aside the merits and drawbacks of imposing such a test, let’s look at what that would involve in this instance.

First, we would need to look determine which bodies of water would now be included under the 2015 definition.

Second, we would need to examine the costs needed to comply with the rules for these newly regulated waters and the potential economic effects of imposing these costs (loss of profitability, job losses, etc).

Next, we would need to investigate the benefits of including the new waters under the regulatory umbrella. And finally, we would have to compare the benefits and the costs – not as easy as it sounds, especially if the benefits and the costs occur at different times.

As with many environmental regulatory cost-benefit analyses, the costs of imposing a new regulation are relatively easy to calculate. In this case, they include permitting costs, administrative costs, associated environmental compliance costs, and wetland and stream mitigation costs. They may also include project relocation costs, if a proposed development were to be located in one of these newly-regulated areas. These are measurable and concrete costs, and they are not insubstantial. The new definition could have potentially affected municipalities, ranchers, farmers, golf courses, and home owners, among others – anyone with a stream or a wetland on their property (of course, assuming that those waters aren’t already regulated by the state, as they are in Maine).

Benefits are more difficult. What would have been the benefits of including tributaries, transitory stream, and wetlands under the federal regulatory umbrella? According to supporters of the 2015 rule, benefits would have included the increased health of larger bodies of water (and by extension, improved human health as well as ecosystem health). In order to protect a lake or a river, the argument goes, you can’t just regulate what goes into the mainstem of the river – you have to monitor what gets into the tributaries as well. But making that link from reduced pollution to improved aquatic health to ecosystem benefits is anything but straightforward. That’s what many environmental and resource economists spend their careers doing.

Benefits could include the avoided costs of drinking water filtration, better flood control, avoided risks of cleanups from spills or other damage, and increased health of fish and shellfish populations. To estimate these benefits, economists at the EPA used “ecosystem services” (see my blog post here). They identified peer-reviewed economic literature that estimated the value of protecting, preserving, replacing, and increasing the size of wetlands. Then, from that literature, they arrived at a per-acre value and multiplied that by the number of acres projected to come under the enlarged jurisdiction.

Crude? No doubt. Developing a country-wide estimate on the value of protecting wetlands is not a pretty process. But at least it gives a number, an estimate of value. If we consider wetlands to be assets, then protecting more of those assets against harm should have some sort of value. The Obama EPA found that the benefits of expanding the definition of the waters of the United States exceeded the costs by a ratio of at least 1.3:1 (under the most conservative assumptions) to as much as 3:1.

When the Trump Environmental Protection Agency proposed rescinding the 2015 rule (thus reverting to the “state of the world” before the 2015 rule), they needed to show that the benefits of rescinding the rule exceeded the costs. They couldn’t accept the Obama EPA’s numbers, because what was previously a benefit would now become a cost, and vice versa. So what did they do? They cast doubt upon the Obama EPA’s estimate of the benefits of protecting ecosystem services, in part by saying that some of the studies were too old and out-of-date, and in part by questioning the methodology. That’s fine – economists regularly squabble about methodology.

Here’s the kicker, though. Rather than try to improve the methodology, or arrive at a “better” number somehow, they did not include the benefits of protecting ecosystem services at all. Because the number was “uncertain,” they literally wrote “uncertain” in the column for ecosystem services, and then proceeded to add up the numbers anyway. In other words, they assigned protecting wetlands and tributaries a value of 0. ZERO. Anyone looking at the “bottom line” and not bothering to read the entire document would not have caught the error.

Estimating the benefits of environmental protection and conservation is not an easy job. And many environmental advocates feel a little queasy at the prospect of assigning a “value” to ecosystems. However, by not assigning a value to them we are allowing others to do so – and the value that they choose could be zero. If we’re serious about protecting our valuable ecosystems from increasing threats, then we need to demonstrate that environmental protection has an economic value – and that it’s not zero. Only once we can talk about regulations confidently in terms of benefits and costs, can we hope to adequately measure the impact of our (in)actions.

What do you think? Do you have any experience with WOTUS – good or bad?

The Price of Everything and the Value of Nothing* – What are Ecosystem Services?

By Rachel Bouvier | June 29, 2016 | Comments 2 comments

crooked_river_tributary

Photo credit: flickr/bobtravis

In October of 2015, President Obama issued a memorandum directing all Federal agencies to factor the value of ecosystem services into Federal planning and decision-making. That necessarily begs the question: what are ecosystem services, and how are they relevant to the economy in Maine?

Ecosystem services are the ways in which natural systems provide benefits to human society. The Millennium Ecosystem Assessment categorizes ecosystem services into four main classifications: provisioning service; regulating services; cultural services; and supporting services. Provisioning services is just what it sounds like – physical products provided by nature, such as water, food, and raw materials, among others. Regulating services are “benefits obtained from the regulation of ecosystem processes,” such as carbon sequestration, water purification, and soil stabilization. Cultural services are more difficult to measure, from an economist’s standpoint: if the lobster industry were to go into a tailspin, for example, the loss to Maine would be far greater than the lost revenue and income would suggest. We would also lose part of our culture, history, and identity. Finally, supporting services are those services that “support” the previous three – such as biodiversity, nutrient cycling, and photosynthesis.

By its nature (pun very much intended!), this is an anthropocentric concept. Ecologists and others will no doubt argue that nature or natural systems have intrinsic value, even if humans are unaffected by a specific ecosystem’s existence. I won’t argue with that. Nonetheless, quantifying and even valuing ecosystem services may be a way of bringing the benefits provided by a well-functioning ecological system into economic decision making. Otherwise, those services may well be disregarded.

Many ecosystems on which Maine businesses depend are at risk, either through mismanagement, human intervention, or changing weather patterns. Ecosystem decline can pose a number of risks to businesses in Maine – as well as create new opportunities.

A simple example: My hometown, Portland Maine, is now home to a burgeoning – and fantastic – micro-brew industry. Micro-breweries (well, any brewery, of course) rely heavily on clean water, hops, barley and malt in their input process. These are examples of provisioning services. Going a little bit deeper, the process also depends upon the regulating services of soil stabilization, climate regulation, water filtration, and pollination. And that’s just in the process of brewing the beer itself. There are also ecosystem services involved in the bottling / canning of the beer (think raw materials such as aluminum or silica), and in the distribution process. And this is only the input side of the equation.

Identifying the ecosystem services relevant to a particular industry can serve two purposes: to pinpoint areas of dependence upon natural systems in order to better predict trends that may affect that industry in the future (certain hops-growing areas may be impacted by changes in growing conditions, for example); and to highlight the value of functioning ecosystems as a part of an industry’s supply chain. Once that value is recognized, the industry might see their own self-interest in managing those ecosystem services, so as to minimize their vulnerability.

So how do you assess your organization’s exposure to and dependence on ecosystem services? There are basically five steps to an ecosystem services review, according to a report by the World Resources Institute, the World Business Council for Sustainable Development, and the Meridian Institute. These steps are: selecting the scope, identifying the priority ecosystem services in your supply chain, identify risks and opportunities, and develop strategies for addressing them. (These guidelines are for businesses, but they can be used to analyze exposure to and dependence on ecosystem services for government, municipalities, and non-profits as well.)

Well, that’s all very interesting, you might say, but how does it affect me, or businesses and organizations in Maine? Here’s my thought: if the White House is directing all Federal agencies to incorporate ecosystem services into decision-making, how far behind can states (at least the more forward thinking ones) be? Massachusetts already has a Division of Ecological Restoration. What about EPA regions? And once “ecosystem services” become a household name (OK, maybe a boardroom name), then the first movers, early adopters, and visionaries better be prepared.

What are your thoughts? Post them here, email me at rachel@rbouvierconsulting.com, or visit my website at rbouvierconsulting.com. You can also like my Facebook page, here, or connect with me on Linkedin, here. Thanks!

*apologies to Oscar Wilde!

Category: ecosystem services