Putting a Dollar Value on Externalities: Today’s Reality
- Assessing ecosystem services can help companies better understand the social, environmental, and economic consequences of their decisions.
- Structured approaches exist for businesses to understand their impact on ecosystem services, but companies should start with qualitative evaluations before undertaking data-intensive quantitative analyses.
- A number of tools for assessing and valuing ecosystem services are available, but few companies have moved beyond piloting these tools.
- Monetary valuation of ecosystems is a useful approach but is only one way of incorporating ecosystem services into decision-making. Corporate practitioners should understand that ecosystem valuation is an emerging field and there is a limited body of knowledge about practical applications.
“In the last couple of years, economic valuation has increasingly been seen as a mechanism to influence policy as well as to help stop the accelerating degradation of the environment.” —Linda Hwang, EcoMetrix Solutions Group
“As a company, regardless of what industry sector you are in, your business is directly and/or indirectly impacting biodiversity and ecosystem services.” —Ayako Kohno, Hitachi, Ltd.
“We should be thinking about [the valuation of ecosystem services] broadly and understanding when and where is the right context to think in terms of dollar signs and when and where is the right context to think in terms of people’s priorities, social issues, and other non-economic ways of understanding the trade-offs we’re making.” —Kevin Halsey, Parametrix
Hwang began the session by highlighting the complexity of ecosystems, citing the significant ecological changes that resulted from the reintroduction of the gray wolf to Yellowstone National Park. Her question to the audience, and the panelists, was whether techniques for assessing ecosystem services are capable of revealing the complexity of environmental changes across diverse regional contexts. Given growing interest in ecosystem services and their economic valuation, this question has significant implications for government policy and for corporate decision-making.
Next, Kohno discussed the importance of ecosystem services to all companies and highlighted the magnitude of economic benefits provided by ecosystems. For example, natural capital worth at least €1.35 trillion globally is lost each year from deforestation. According to Kohno, companies trying to understand their impacts on ecosystems should start with a qualitative assessment, in order to obtain a big-picture perspective. This can be followed by a quantitative assessment, which often requires significant data collection and analysis. Finally, Kohno said that “monetary data is not always available or required,” highlighting a session theme that economic valuation can be challenging and is not always a necessary part of ecosystem services assessments.
Kohno then introduced the “Guide to Corporate Ecosystem Valuation,” published by the World Business Council for Sustainable Development, which outlines a five-step process for valuing ecosystems. The process starts with scoping and planning, followed by conducting the actual valuation and applying the results. As a final step, companies can integrate ecosystem valuation into existing business processes. Kohno explained how Hitachi used the guide to assess the ecosystem implications of expanding its water and wastewater-treatment operations in the Maldives. Comparing the current ecological baseline with various development scenarios over a 30-year timeframe allowed Hitachi to better understand the ecological costs and benefits of its business decisions.
To start his presentation, Halsey shared a common misconception about ecosystem services—that a particular ecosystem can be easily understood in terms of its economic value. Instead, he discussed the importance of first understanding the physical and biological condition of the ecosystem in question, the ecological functions it serves, and the diverse benefits it provides, before considering how to value the ecosystem.
In addition, Halsey highlighted a few examples of ecosystem valuation being put into practice. The village of Ruidoso, New Mexico, is in the process of establishing a “payment for ecosystem services” program to maintain nearby forestland and prevent destructive forest fires. This ensures the longevity of the forest, protecting Ruidoso’s watershed and preventing catastrophic flooding in the town. Halsey also discussed a Fortune 100 company that used ecosystem valuation to identify the best use for buffer lands surrounding one of its facilities.
Simpson, who said that his views were his own and do not necessarily reflect those of the U.S. Environmental Protection Agency, wrapped up the panel discussion by sharing some important points for companies considering ecosystem valuation. He emphasized that each ecosystem’s unique context will strongly influence its value. For example, an ecosystem providing water-purification services will have a much higher economic value if located near a city (with its high demand for water) than if located far from human habitation. Simpson also cautioned that not all benefits of ecosystems can be captured in financial valuation alone and that this process can be “complicated, controversial, and imprecise.”
The question and answer section focused on two topics: risks in using ecosystem valuation and drivers for increased uptake of ecosystem services approaches. Regarding risks, both Hwang and Halsey indicated that liability issues arising from monetary valuation of ecosystems are a notable concern for companies, and Simpson highlighted the lack of clear property rights regarding benefits from ecosystems. Hwang and Halsey also highlighted the opportunity to use ecosystem services to better identify and manage risks associated with altering ecosystems, enabling improved decision-making.
Regarding adoption of ecosystem services approaches, panelists identified two important recent drivers:
- The inclusion of ecosystem services in the International Finance Corporation’s Performance Standards on Environmental and Social Sustainability
- The support of 40 financial services companies for the Natural Capital Declaration, which commits signatories to “work together to create the conditions necessary to maintain and enhance natural capital as a critical economic, ecological, and social asset”
Hwang wrapped up the session with a summary of the benefits of ecosystems valuation as well as a caution, given the amount of uncertainty that remains in applying the approach. She emphasized the importance of knowing when to apply monetary values to ecosystems and when to examine ecosystem services more qualitatively.
Date and Time
Wednesday, October 24, 2012, 1:15 pm-3:15 pm
- Ayako Kohno, Assistant Manager, Environmental Strategy, Hitachi, Ltd.
- Kevin Halsey, Lead, Ecosystem Services Analysis Efforts, Parametrix
- David Simpson, David Simpson, U.S. Environmental Protection Agency’s National Center for Environmental Economics
- Linda Hwang, Principal, EcoMetrix Solutions Group (Moderator)