International Water Management Course

1. International Water Management Course Values, Prices and Instruments For Water Management Joel D. Scheraga, Ph.D. September 29, 2004

2. Presentation Overview • Water is a scarce resource • Challenge for water resource managers • Water provides diverse services • Example: Ecosystem Services • Problem: How to value services? • Different disciplines have differing methods of valuation • Economic valuation • Sample application: Recreational fishing

3. Water is a Linchpin • Many regions, localities, and sectors are linked by available water supplies • Multiple sectors demand and compete for available water for different uses: drinking water agriculture industry urban uses wildlife & ecosystems recreation

4. Water is a Scarce Resource • Desired • Often limited in quantity

5. The Challenge: Water is Often Scarce Water is often (but not always) desired ….. but limitedin quantity Too much water (not scarce) (Bangladesh flood, 2004) Too little water (scarce) (Malawi drought, 2002)

6. Challenge for Water Resource Managers Allocate scarce water supplies • efficiently • equitably Protect waterquality • Different disciplines have differing methods of valuation • ecology, biology & natural science • economics • Economic valuation • one approach for providing useful insights • informed by ecological assessments • market values • non-market values

7. Emerging Challenges • Population growth • Economic development • Global environmental change • climate change • land use change • UV radiation The water resource manager’s job is only going to get harder!

8. Fundamental Problem of Economics The allocation of scarce physical and human resources among competing and unlimited human wants and desires

9. Water Provides Diverse Services Water for nature Water for agriculture Water quantity Water quality Seasonality of flow Domestic water Water for recreation Water for industry Given scarcity, trade-offs must be made!

10. Example of Difficult Tradeoff for Decision Makers Use of water to sustain ecosystems vs. Use of water for food production

11. Tools Exist for Evaluating Trade-offs Using Multiple Criteria For Decision Making • Example: EPA’s TEAM Web-based Decision-Support Tool • TEAM: Tool for Environmental Assessment and Management • Interactive, web-based tool • Purpose: Help water resource managers include considerations of climate change in their day-to-day decision making • Employs multi-criteria decision making approach • Decision criteria defined by user • Objectives defined by user

12. Example of Types of Services Water Provides Ecosystem Services

13. Ecosystem Services Ecosystem services refers to how humans benefit from ecosystems: “…a wide range of conditions and processes through which natural ecosystems, and the species that are part of them, help sustain and fulfill human life” - Daily et al., 1997

14. Ecosystem Services Ecosystem services relevant to freshwater ecosystems include: • recreation (including hunting and fishing) • intrinsic or existence values (value of something irrespective of any human use) • amenity functions • wildlife viewing • maintenance of biodiversity and landscape diversity • water quality protection and regulation of water flows • genetic material and maintenance of a gene pool • amelioration of weather and climate regulation

15. Ecosystem Services (cont.) • pest control • fisheries • soil retention (erosion control), formation, and maintenance of fertility • storm protection, flood control and regulation of hydrologic cycles • nutrient cycling • cultural (e.g., aesthetic, artistic, spiritual, scientific values) • food and fiber production • medicines and pharmaceuticals

16. Challenge for Policy Makers • Decide which use of scarce resources (e.g., water) is valued higher • Societal decision • Assessors can inform: Values human place on different resources, e.g., • survival of wildlife • ecosystem functions/services • adequate human nutrition • We can facilitate: Understanding of tradeoffs (nature & magnitude) inherent in any decision • Assessors’ job is not to make policy decisions

17. Differing Methods of Valuation • Different disciplines have differing methods of valuation • Ecologists, biologists & natural scientists • Economists • Potentially inconsistent water management recommendations emerging from different approaches

18. Economic Valuation • One approach for providing useful insights • Informed by ecological assessments

19. Methods for Economic Valuation Illustration: Ecosystem Services

20. Important Caveat There are aspects of ecosystems that are valuable but may not be amenable to economic analysis Such circumstances may require: • other analysis and communication tools • other decision-making frameworks

21. Measuring the Economic Value of Ecosystem Services • Economic definition of value: the amount of compensation required to make individuals as well off after a change as before the change. • Value to society: determined by the sum of individual values when there is a marginal change in an ecological service (e.g., recreational fishing)

22. Values for Ecological Services: Categories and Examples • Market Use Values: • food, building materials (e.g., gravel), fuel, drinking water supplies, electric power generation, transportation of coal, tourism • Non-market Use Values: • recreation, fishing, swimming, boating, hunting, bird-watching, hiking, camping, sight-seeing, transportation and fuel; • flood control, mitigation of drought, storm water treatment and/or retention, partial stabilization of climate, water purification, cycling of nutrients and minerals, flow of energy • Non-market Nonuse Values: • habitat value, scarcity value, option value, existence value, cultural value, historical value, biodiversity, intrinsic value, bequest value, philanthropic value

23. Valuing Changes in Ecological Services • Economists use several methods to measure people’s willingness to accept tradeoffs… • whether they are ecologists, economists, bird watchers, hikers, carpenters, baseball players, ballerinas, musicians, etc. • Prefer methods based on how people behave when faced with real-world tradeoffs • e.g., between ecological services and other goods • revealed preference approaches • When observed behavior does not reveal preferences: • survey techniques • stated-preference approaches

24. Methods for Valuing Changes in Ecological Services Revealed Preference • (Hedonic) Property Value • uses changes in private property values to estimate an implicit price for changes in ecological services • relies on “natural experiments” • Travel-Cost Method • observes recreators’ observed pattern of trips among available sites • accounts for observed variations in site characteristics, including ecological services

25. Methods for Valuing Changes in Ecological Services Stated Preference • Contingent Valuation • involves direct survey of individuals to elicit their “willingness to pay” for different levels of services • Stated Choice • Involves survey in which respondents are asked to express preferences among attributes that include specific ecological services (e.g., fish catch; protecting an endangered species) • Strength: respondents think in terms of tradeoffs • Researchers can identify equivalent tradeoffs by analyzing series of responses

26. Challenges in Translating Ecological Value to Economic Value • Conditions ideal when: • possible to describe or predict the ecological change accurately, • nature of ecological good/service that is lost/gained is understood, and • importance of the change can be quantified (e.g., monetized) or ranked • These ideal conditions seldom are met. • Three major challenges: • uncertainty • irreversibility and cumulative effects • issues of fairness (e.g., intergenerational equity, discounting, and environmental justice)

27. Economic Valuation: A Sample Application Valuing Economic Lossesto Recreational Fishingdue to Climate Change

28. Sample Application “Ecological Impacts from Climate Change: An Economic Analysis of Freshwater Recreational Fishing”(EPA, April 1995)

29. Sample Application: The Problem • Climate change poses risks to opportunities for • recreational fishing • Warmer water temperatures affect the range and • availability of different fish species • Recreational fishing is highly valued in the U.S. • and contributes substantially to the national economy

30. Sample Application: Methods • Climate scenarios were chosen to provide plausible • range of outcomes • A thermal model predicted changes in fish habitat

31. Sample Application: Methods (cont.) • An economic model predicted changes in angler behavior • National fishing model (Vaughan and Russell, 1982) • Projected changes in total days spent on recreational fishing • By guild of fish (under baseline and climate-changed • conditions) • As a function of changes in fishable acreage for cold, cool, • warm, and rough guilds of fish species

32. Sample Application: Valuation Estimates of the value of fishing days for certain types of freshwater fishing were derived from 71 studies [travel cost models] (Walsh, Johnson, and McKean, 1992)

33. Sample Application: Results Estimated economic impacts for recreational fishing range from damages of $320 (US) million per year to benefits of $81 (US) million per year (1993 dollars)

34. Concluding Thought “... benefit-cost analysis does not dictate choices; nor does it replace the ultimate authority and responsibility of decision makers. Rather, one should regard economic valuation and cost-benefit analysis as experiments testing the robustness of a project to alternative assumptions concerning the magnitude of costs and benefits, and the various social demands with respect to the return on invested capital.” - Alex Dubgaard (2003)