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Project update. Each step builds on the previous step Your problem statement uses your literature review to tell a story. The story will conclude with your goals. Objectives are the steps you take to achieve your goals. Methods explain how you will achieve your objectives.
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Project update • Each step builds on the previous step • Your problem statement uses your literature review to tell a story. The story will conclude with your goals. Objectives are the steps you take to achieve your goals. Methods explain how you will achieve your objectives.
The Question • Can monetary valuation of the environment help us balance marginal costs and marginal benefits of economic decisions? • Can it help us solve the macroallocation problem?
Functions of prices • Measure value • Maximize monetary value • Allocation function • Rationing function • Does it work? Non-rival goods • Is it what we want? • Measure scarcity • Accounting
Conventional Valuation Methods • Direct market value • Indirect market value • Avoided cost • Replacement cost • Factor income • Travel cost • Hedonic pricing • Contingent valuation • WTP • WTA • Loss aversion
Current Applications • Cost Benefit Analysis • Internalizing externalities (e.g. green taxes, assurance bonds, etc.) • Policy decisions (e.g. climate change, biodiversity loss) • Regulatory choices (e.g. leaded gasoline) • Expenditure decisions • Damage assessments • National accounts • Calling attention to the problem
What is CBA? • Can the winners potentially compensate the losers? • Potential Pareto Optimality
Discounting • How do we deal with future values (costs and benefits)? • Opportunity cost • Pure time preference • Richer future • Uncertainty
Incommensurability • Can all things can be measured in same units? • How much for your daughter?
Uncertainty, Ignorance, Irreversibility and Complexity • Emergent phenomena, surprises, thresholds • Amazon, rainfall and the Cerrado • Mata Atlantica, habitat loss, extinction and time lags • Monetary values can be no more accurate than ecological knowledge
Future Generations • Cannot possibly bid in today’s markets • Monetary valuation assumes they have no rights.
When and How do we Apply Valuation? The Case of Critical Natural Capital
Critical Natural Capital • Components of natural capital that are essential to human survival and for which there are no adequate substitutes • Ecological thresholds • Interdependent elements of complex system
Region 1 • E.g. forests in Vermont • Price can determine conservation needs • Estimate monetary value, provide information to decision makers, feed into market price (e.g. green taxes) • Only appropriate when rate of change in value is slow, i.e. region I • Far from threshold, errors not that important
Region II • Estimated price very sensitive to errors • Let knowledge of thresholds and other ecological criteria determine conservation needs • Conservation needs then determine price • Prices adjust to conservation constraints much more rapidly than ecosystems adjust to prices. • E.g. laws (unenforced) limiting deforestation in Amazon • International incentives essential
Region III • Restoration is essential • E.g. Atlantic Forest • Time lags give us limited time to act • Economists should focus on supply curve, not demand curve • What is most cost effective way to restore critical natural capital?
Region III • Finance more important than valuation • Must combine polluter pays principle, beneficiary pays principle • Trace flows of damages and benefits • Wealthy countries must finance provision of global public good benefits, pay for costs of global climate change • ICMS ecologico good model
Integrative, applied methods • What is the value of salmon in the Puget Sound • ARIES http://www.youtube.com/watch?v=5yHnUTPADMw
Conclusions • Worst approach is to assign no value to environment • Environmental valuation can help determine when conservation is needed • Calls attention to problem • Can help in allocation when ecosystems are healthy, resilient • Economic values never better than ecological knowledge—close collaboration essential
Conclusions • For stressed systems, conservation needs must determine environmental values • Economics take back seat to ecology • Many, many systems are stressed • Global effort required to protect globally interconnected ecosystems • Beneficiary countries should pay provider countries • Ecologists/life scientists must educate economists on thresholds, criticality of natural capital