Welcome back, dear Friend! In the previous training, we talked about different ways people benefit from ecosystem services and how they attach value to these services.
We talked about different categories of values, including use values, such as direct use and indirect use, option value, and non-use values, such as bequest, altruistic, and existence values.
So, all these values that people attach to ecosystem services form the Total Economic Value of that forest ecosystem. And here, in this training, we will talk about how exactly to monetize the Total Economic Value.
Indeed, in the last training, we asked the question “How can we quantify different values within the Total Economic Value framework?” And, actually, this is needed for quantifying them and for demonstrating these values in decision-making, in land use planning, and in any policy-making regarding management of a forest. In fact, we can do it. We can “translate” the economic values of ecosystem services into the universally understood “language” of money. And this is where different methods and techniques of economic valuation come to our aid.
So, economic valuation of ecosystem services is a set of tools and methods that allow us to quantify the ecosystem services and “translate” them into the “language” of money, so that we can use them in cost-benefit analysis, land use planning, environmental policy-making, and so on. In other words, economic valuation of ecosystem services is a convenient way to assess and demonstrate the benefits and value of ecosystem services, especially when there is no actual market for them.
Generally, scientists define two broad categories of economic valuation techniques: revealed preference techniques and stated preference techniques.
Revealed preference techniques allow you to observe or to reveal people’s values for specific ecosystem services from the actual behaviour they do to obtain these ecosystem services. For example, in a park or a forest, people go for recreation. They can pay entrance fee to that park or the forest, which indicates how much they value and are willing to pay to access the recreational services. Certainly, you may understand that revealed preference techniques are very good in eliciting use values, but are not good in understanding and quantifying non-use values, which do not have actual prices and market for them.
Each of these two types of economic valuation techniques has different methods on how to approach the question of quantifying and demonstrating values of ecosystem services.
Let’s look at the most common ones. In terms of revealed preference techniques, we can look at the hedonic pricing method and the travel cost method.
Hedonic pricing means that ecosystem services are part of some bundle of goods that are traded on the markets. And we can estimate the value of ecosystem services within this bundle by comparing them to the equal goods without these ecosystem services.
For example, we can consider the prices of houses that are located near this forest and compare them to the prices of houses located elsewhere, for example, in the city. And then, comparing the prices for these two housing options, we can elicit the premium that people are willing to pay to live near this beautiful forest.
Travel cost is another revealed preference method. It consists of the approach to estimate the value of ecosystem services from the prices or the value of associated goods required for people to access those ecosystem services.
For example, if we want to estimate the recreational value of this forest, we can consider the number of visitors that the forest receives, let’s say, per year and then all the costs that people coming here incur, when they try to reach this forest. For example, the value of time people need to get here, the price of a ticket to enter the forest, maybe the transportation costs, the price of petrol, and purchases of food, snacks, and drinks, when they get here and enjoy the forest. Altogether, these costs can demonstrate how much people value in monetary terms the recreational ecosystem services in this forest.
Speaking about stated preference techniques, here we can mention two most commonly used methods. These are the contingent valuation and the choice modelling, or choice experiments. Both of these methods allow us to elicit use values and non-use values by asking people how much they are willing to accept in compensation or are willing to pay for any changes that might occur to forest ecosystem services.
Contingent valuation is a stated preference technique, where you actually ask people directly about how much they are willing to pay or willing to accept in compensation for a change in the provisioning and quality of an ecosystem service. Alternatively, you can offer people to choose between different bundles of attributes of ecosystem services and then again ask them about how much they are willing to pay for the preferred one or willing to accept in compensation for the least preferred option. In this way, for example, you can conduct a contingent valuation study and ask people about, let’s say, how much they are willing to pay for an environmental afforestation initiative that would increase the area of this forest, let’s say, by five percent and the diversity of tree species, let’s say, by ten percent.
Choice modelling, or a variation of it called choice experiments, is another stated preference technique similar to contingent valuation. However, in this case, you do not ask people directly about their willingness to pay or willingness to accept compensation. You infer these values from their preferences and choices. And people express these preferences and choices in surveys, in direct interviews, and in other conversations with you, where you ask people to choose among different scenarios and the status quo option. These scenarios and the status quo scenario are grouped into various sets. So, people go through each set and choose the option they prefer the most or the scenario they like in each set.
Each scenario in a set has a specific “price”, let’s say, that allows you to estimate the willingness to pay or willingness to accept compensation from each set. And by using economic or econometric models, estimations, calculations, and software you can then estimate the willingness to pay for whatever ecosystem services you are evaluating from people’s choices and preferences.
For example, we can estimate, let’s say, the biodiversity of this forest and how people appreciate it from such a choice modelling questionnaire and research. So, you may present scenarios to people, where you show how much the biodiversity would increase if certain schemes or plans are implemented in the forest. Each scenario, again, has specific price associated with it. Then, you can actually estimate from all the answers the preferred scenario or the preferred method that people would like to be implemented in this forest and how much they are willing to pay for increasing the biodiversity here.
In fact, this is what we did in the Codru Quest project that we realized in 2017. We, the researchers at MEGA, used choice modelling and the specific variation of it, choice experiments, to estimate the direct use and non-use values of ecosystem services and biodiversity conservation in the Codru forest and the Codru Nature Reserve.
Certainly, there are many more economic valuation techniques worth talking about and there are many more things to know on how to apply them in practice. Therefore, we encourage you to research more on this topic and also to see the reference list for this course. There you will find the report from our Codru Quest project, examples of our questionnaire that we used, and models and datasets that you can also look through to understand how we applied the choice modelling method and estimated the exact values of ecosystem services in the Codru forest.
Figure 1. Most commonly used methods of economic valuation of ecosystem services.
But, as we learn more about the values of ecosystem services and economic valuation techniques to estimate these values, many more questions arise. For example, why do we need all this complexity of various techniques and methods to estimate the value of the forest? And why do we need to do it in the first place? Then, if people value forests so much and are willing to pay to protect them, then why are we losing forest ecosystems? Why are they degrading? And finally, how can we stop or prevent threats to forests and forest ecosystem services? We will help you answer these questions in the next training of the course. See you later!