Cents and nonsense: A critical appraisal of the monetary valuation of nature

Journal Paper by Peter Victor
Ecosystem Services Vol 42 | Published online: February 2020

Summary

Current controversies in valuing the cost of environmental changes like climate change and biodiversity loss have exposed serious flaws in standard welfare economics, Peter Victor writes. Many of these arise from the assumption that social value can be calculated using the revealed or stated preferences of self-regarding, narrowly rational individuals.

In recent decades, markets and market-oriented thinking have reached into spheres of life traditionally governed by non-market norms. This paper is a revised version of Pricing Nature, chapter 4 in Victor (2019).

Introduction

The enthusiasm with which the monetary valuation of ecosystem services has been embraced by economists, policy makers, environmental activists, and others concerned about human impacts on the environment is striking. Building on the theory of externalities dating back at least as far as Pigou’s The Economics of Welfare (1920), ingenious methods have been developed to assign a monetary value to the unpriced services of nature from which humans benefit, commonly referred to as ecosystem services. One well known classification of these ecosystem services groups them into four categories: 1) provisioning, such as the production of food and water; 2) regulating, such as the control of climate and disease; 3) supporting, such as nutrient cycles and oxygen production; and 4) cultural, such as spiritual and recreational benefits. (Millennium Ecosystem Assessment (MEA), 2005). An essential feature of ecosystem services is that they are a flow that is provided over time. Accordingly, they should be conceptualized and measured as services per unit of time. As with any flow of services, ecosystem services cannot be stored, saved and used at a later date. If they are not used today, there will be no extra services available tomorrow.

A concept closely related to ecosystem services and which is also receiving considerable attention, is that of natural capital. A typical definition of natural capital is:

the world’s stocks of natural assets which include geology, soil, air, water and all living things. It is from this Natural Capital that humans derive a wide range of goods and services, often called ecological goods and services, which make human life possible. (World Forum on Natural Capital, 2017)¹

From the perspective of this definition, flows of ecosystem services are derived from natural capital which consists of stocks. Stocks have the distinctive characteristic that they exist at a point in time. They can be depleted and increased depending on how they are used and cared for, and this affects the type and level of ecosystem services that they are able to provide. This intimate relationship between ecosystem services and natural capital plays an important role in their valuation. Broadly speaking, the more valuable the ecosystem services, the more valuable is the natural capital from which they are derived.

The observation that humans obtain life giving and life sustaining value from living within nature has origins that go back millennia. It is an idea that is embodied in most religions, some of which predate recorded history. What is new is the proposition that decisions made by people acting alone or collectively, can be improved if they are based on monetary valuations of nature which, for the purposes of this paper, means the monetary valuation of ecosystem services and natural capital.²

What follows is a critical review of the conceptual framework, estimation methods, and data used to develop these monetary valuations. It leads to the only reasonable conclusion, shared by others (e.g. Fourcade, 2011) that such valuations should be used with great caution or not at all in informing decisions and driving public policy the outcomes of which have environmental consequences.