Ask Oppla question by Claire Gouvary

How can we insert ecosystems in our monetary system, since it is imposssible to evaluate financially all the services given freely to us by Nature? Are compensation taxes really "good", since it is like paying to polluate (so the rich ones can still pollute without problem)?


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How can we insert ecosystems in our monetary system, since it is imposssible to evaluate financially all the services given freely to us by Nature?

Yes it may well be impossible to completely evaluate financially all the services given freely to us by Nature, but that is no reason not to start the process. The integration of economic, ecological and social values of ecosystem services is complex but the realization that one dimensional assessments (commonly economic) has not delivered a sustainable rural environment has encouraged researchers to explore integrated methods.

One of the OpenNESS Case Studies CS09 Cairngorm National Park Management (http://www.openness-project.eu/node/62) has studied the results of an integrated assessment using ecological values (land cover), economic values (income to the estate from farming and shooting) and cultural values for recreational use of the land expressed both as a social value (time) and a monetary value (time multiplied by personal income). The approach was evaluated by a local decision maker to be a useful as it spatially highlighted the social and commercial value of land parcels within the estate in a credible, salient and legitimate manner. The wider relevance of this approach to furthering the aims of community-led, asset-based, development of rural communities through the local landscape partnership and of natural capital accounting for the owners of the land is currently being investigated.

Are compensation taxes really 'good', since it is like paying to pollute (so the rich ones can still pollute without problem)?

This can indeed be a problem and in the OpennESS Case Study 26 (http://www.openness-project.eu/node/48  ) researchers working in the interior of Sao Paulo State, Brazil  have, while interviewing sugar cane farmers, heard of farmers who prefer to pay the fine rather than maintain the 20% of their land uncultivated as required by law. This however simply means the regulatory mechanism is ineffective. Researchers using participatory methods are working with local decision makers to construct compensation mechanisms for ecosystem services in the sugarcane belt. These analyses will provide relevant information on the viability and plans for implementation and operationalization of PES within rural areas in the state of Sao Paulo.

Posted on: 3 Mar 2016 - 12:14

How can we insert ecosystems in our monetary system, since it is impossible to evaluate financially all the services given freely to us by Nature?

It is technically possible to put a price tag on every service, but this indeed does not capture the broader societal values involved in decision making. Also, these prices are derived in very different ways and hence comparability of the unit (dollar) is a hoax. Monetising all services is not the issue.

Monetary numbers of ecosystem services are useful for communicating the 'cost of inaction' or the 'damage caused' by decrease in service support and supply. Behind these costs however, there are 'real' physical and social impacts (lives or live-years lost, damage to infrastructure, loss of wellbeing, biodiversity, heritage,...) which are not only more tangible, but also clarify that these cannot be simply compared, let alone compensated. However, carefully internalising some of the reliably quantifyable damages ('polluter pays principle') can be an effective instrument in a well-controlled context to change behaviour and steer markets clear from profitable degradation.

Also: cost-based valuation methods as mentioned above become more decision-relevant when governments set environmental or health policy targets (through socially inclusive decision-processes, rather than benefit-cost analysis). Then cost-effectiveness analysis becomes a practical approach to achieving targets at least cost. Ecosystem service thinking complicates the quantification of environmental/health targets because different targets are linked through ecosystem functions. Then multi-criteria assessments are required, but at least they have the possibility of being more transparent than all-monetary benefit-cost-analysis. Due to lacking bio-physical quantification of policy impacts, often policy alternative analysis in practice must be simplified to a qualitative assessment of the instruments with the least number of side effects.

Monetary valuation can also be useful in instrument design - for example using 'willingness-to-pay' (WTP) user fees or taxes to fund measures to address particular environmental problems. Or 'willingness-to-accept' compensation for damages in an environmental liability context. Which approach is valid depends on who has the rights to environmental quality and what kind of governance context is being used to resolve the issue. Note that WTP and WTA valuation methods are then used to inform policy to resolve a particular conflict of interest at a particular place and time. The methods are not used to generate generic values for ecosystem services which can be employed in benefit-cost analysis of other policy questions elsewhere at other times.

Addition by Erik Gomez: Introducing ES in the monetary system may not always or even often desirable. Monetization is often a poor way of capturing the way people attribute importance and meaning (value) to most cultural, regulating and habitat services (commensurably problem). In addition, if the institution in mind for introducing ES into the monetary system is the market, then two additional considerations are important. First, ES have public or common good character so setting up markets is technically difficult (ES are often 'non fingible' or separable into discrete tradable units) and expensive (ES are often 'non rival' or 'non excludable', meaning high transaction costs). Second, for ES covering basic human needs markets are unlikely to secure a fair allocation of benefits as they privilege access by those with ability to pay. For these reasons many people believe that most ES should not be primarily governed by market values and norms. Under conditions where ES have dubious commensurability in money, and present low rivalry, low excludability and low fungibility, public policy regulation (rewards, taxes and command) is often more effective.

Posted on: 3 Mar 2016 - 13:14

Are compensation taxes really 'good', since it is like paying to pollute (so the rich ones can still pollute without problem)? 

With input from Erik Gomez and David Barton: 

Compensation taxes, payments for environmental services, and a broad range of instruments are being developed and tested. Although these include monetary elements, these instruments are never entirely market based or entirely monetary. They can ony be effectively applied in a mix with a supporting policy framework allowing implementation and regulation, and should contain checks for ecological and social fairness. Most off all, these instruments are only realistic if they are fine-tuned to the specific socio-economic and ecological context. Application of these instruments in another context or as a 'one size fits all' solution will generate adverse effects, presumed they would be accepted. So they can be 'good' or 'bad' or just 'not realistic'.

Also: Do you mean environmental taxes which are then earmarked to compensate for the damage within the same ecosystem/sector? Often ministries of finance will not allow environmental taxes to be earmarked to measures in the sector where they were generated so that the measure is fiscally neutral for the sector involved - i.e. taxes bad practices and then funds are used to compensate good practices. This is based on a principle of fiscal efficiency (using public funds where they are most valuable) which makes it politically much more difficult to implement environmental taxes in any particular sector. My personal assessment is that fiscal efficiency is very difficult to assess (see cost-benefit arguments in the previous question), so the principle is in fact inoperable in most cases and outweighed by the benefits or reaching environmental taxation agreements with specific sectors.

The choice of environmental taxes or payments depends on the interpretation of rights to use ecosystem capacity and access to environmental quality. If de facto rights have historically been assigned the polluter, environmental taxes may be one of the solutions that are needed. Alternatively, the government can set an environmental target (for some environmental issues which are not to spatially specific) and then assign rights for using ecosystem capacity to polluters which they can trade. Over time governments can tighten the target and gradually restrict total impact. See Arild Vatn (2016) new book Environmental Governance for an extensive discussion of the institutional implications of what you choose.

Best of all, is to set the environmental limits when a sector of the economy is in its infancy. There are long term investments which need to be planned in accordance with the distribution of environmental rights given to the sector by society. If rights are established after the fact, environmental damages are much more costly to mitigate, compensate and rectify. So the value of ecosystem services is intimately connected to the rights allocation. See Vatn (2016) for the details of this argument (I am not Arild Vatn by the way...).

Posted on: 3 Mar 2016 - 15:14

There are two rather different aspects to this question of 'inserting ecosystems in our monetary system'.  One is the issue of whether and how we can estimate the value of natural systems and services in monetary units, to enable us to compare these values with other monetary values.  The other is the question of developing policy instruments  that can ensure that the values of these free natural services are recognised and respected, by influencing the incentives faced by firms and consumers, or by more directly controlling activities.

There is a huge literature on valuing environmental goods and services, and on using this information for informing decisions through cost-benefit analysis and natural capital accounting.  TEEB (The Economics of Ecosystems and Biodiversity; http://www.teebweb.org/) is an excellent resource and included publications tailored for different groups:

TEEB Ecological and Economic Foundations. A report on the fundamental concepts and state-of-the-art methodologies for economic valuation of biodiversity and ecosystem services;

TEEB in National and International Policy Making provides analysis and guidance on how to value and internalize biodiversity and ecosystem values in policy decisions;

TEEB in Local and Regional Policy Management provides analysis and guidance for mainstreaming biodiversity and ecosystem values at regional and local levels, copiously illustrated with case study examples;

TEEB in Business and Enterprise provides analysis and guidance on how business and enterprise can identify and manage their biodiversity and ecosystem risks and opportunities.

Mainstreaming the Economics of Nature provides a synthesis of the approach, conclusions and recommendations of TEEB

A more introductory set of documents on 'Demystifying Economic Valuation' is being developed by the valuing nature network and should be available in late Spring 2016: see http://valuing-nature.net/node/377/

There have been many applications of valuation methods at many scales - the IPBES catalogue maintains a searchable map of these: http://catalog.ipbes.net/   There is extensive documentation, for example, for the UK National Ecosystem Assessment and Follow-On (http://uknea.unep-wcmc.org/).  While the methods are far from perfect, considerable progress has been made in developing robust assessment of at least part of the ecosystem services underpinning human life and economic activity.  Taking these values into account in decision making helps to justify the financial costs of expenditures to protect the environment, and helps to consider the full costs of activities that damage the environment. 

On the matter of instruments, valuation need not imply the use of taxes or other monetary instruments.  It can also be used, for example, to inform the choice of standards or quotas.  But whatever the instruments are used to achieve desirable outcomes, they are likely to have distributional consequences, especially if they are taxes, charges or payments for ecosystem services.  Environmental taxes can indeed be seen as 'paying to pollute', and that can have a regressive impact - eg taxes on energy/fuel may form a larger proportion of the income of poorer households than richer ones.  But it is not quite the rich 'polluting without problem' since paying the tax will transfer money from the polluter to the government.  And that will allow either increased spending on services, or reduced taxes on other areas, for example national insurance or income tax.  A 'green tax shift' to taxing 'bads' (pollution) instead of work or income could give the 'double dividend' of reducing pollution while encouraging employment.  The details need to be worked out for any given case, but in principle taxes can be used to achieve socially desirable levels of pollution, while any undesirable distributional consequences can be addressed through other policies, using the tax revenues raised.  But the question of whether environmental taxes are 'good', or the most appropriate way to achieve environmental targets, is inherently political/normative and cannot be resolved just by economic analysis.

Posted on: 4 Mar 2016 - 16:15

Some additional notes on the Brazilian case study mentioned above:

1- We have a federal law called Forest Code which, in the studied region, demands farmers to keep 20% of their farm as native vegetation (forest).

2- In a historical perspective, farmers have not complied to this law. The system of applying fines is ineffective.

3- Also in a historical perspective, there have been many discussions whether the burden of protecting these areas should be directed only to farmers, given that the protection of these forests benefit the society as a whole.

4- That said, there a line of thinking in our 'law schools' that to make farmers comply with the law (and aiming at the good of society in general) we should move to a proactive incentive-based system instead of a passive fine-and-punishment-based which didn't seem to work.

5- Because of that I am personally not against this payment to farmers. I wouldn't call it though as a 'compensation' if we consider that farmers are the providers of ecosystem services.

Posted on: 4 Mar 2016 - 16:15