METHODS

Valuing nature: From environmental impacts to natural capital

Diego Azqueta

, Daniel Sotelsek
University of Alcal, Spain
A R T I C L E I N F O A B S T R A C T
Article history:
Received 6 November 2006
Received in revised form
30 December 2006
Accepted 23 February 2007
Available online 18 April 2007
Economic valuation of natural and environmental assets is now a well established practice.
Economic analysis provides several methods for discovering the impact on social welfare
associated with changes in the ability of these assets to provide different goods and services.
In general terms, these valuation exercises have been performed in the framework of
Environmental Impact Assessment or, more generally, Cost Benefit Analysis. There is,
however, an increasing demand nowadays to go beyond this framework and to value natural
capital (natural resource stocks, land and ecosystems) as such. There are two main reasons
for this new demand. On the one hand, sustainability requires that proper account should be
taken of capital depreciation and, therefore, there is a need to value natural capital changes.
This valuation process, nevertheless, only makes sense when some kind of substitution
between natural and other forms of capital is allowed. On the other hand, there is also an
increasing tendency to demand that the stock of natural capital present in a given territory
be valued, either to discover one of the main components of social wealth or to help
adequately plan changes in land use. Yet, whereas conventional valuation methods are
probably adequate to fulfill the first task, this is less true in the case of the second, while
even more difficulties arise in connection with the third one. Even if at first sight the process
appears conceptually identical, these tasks are of a different order of magnitude, as the
experience of both the World Bank and the Statistics Division of the United Nations in this
respect clearly shows.
2007 Elsevier B.V. All rights reserved.
Keywords:
Natural capital
Hicksian income
Environmental accounting
1. Introduction
Economic analysis provides several methods to value changes
in environmental assets. We are able now, in general terms, to
translate into welfare changes, a wide array of environmental
impacts associated to different projects and activities. It would
not be unfair to refer to this process as the micro aspect of
environmental valuation. On the other hand, however, there
is an increasing demand to transcend this framework and to
move into what could be called the macro aspects of valuing
nature: i.e., the necessity of having some idea about the value
of natural capital (natural resource stocks, land and ecosys-
tems). The reason has to do with, among other things, with
social welfare and sustainability: there is a need to value
natural capital in order to be able to introduce this figure into
National Accounting, and thus to be able to calculate a precise
E C O L O G I C A L E C O N O M I C S 6 3 ( 2 0 0 7 ) 2 2 3 0

A preliminary version of this paper was presented at a Seminar held in ECLAC-CEPAL, Santiago de Chile, on June 2004. It was also
discussed in July 2005 with doctorate students at the National University in Bogot (Colombia) and in October 2006 at the II International
Seminar on Natural Resource Economics held in Quirama (Colombia). Comments and suggestions received in these meetings, as well as
those of three anonymous referees are acknowledged.
Corresponding author. Departamento de Fundamentos del Anlisis Econmico, Plaza de la Victoria 3, 28802 Alcal de Henares Madrid,
Spain. Fax: +34 91 885 42 39.
E-mail address: diego.azqueta@uah.es (D. Azqueta).
0921-8009/$ - see front matter 2007 Elsevier B.V. All rights reserved.
doi:10.1016/j.ecolecon.2007.02.029
avai l abl e at www. sci encedi r ect . com
www. el sevi er. com/ l ocat e/ ecol econ
value for the Hicksian income. Conventional methods of
economic valuation of the environment, however, are well
fitted to cope with marginal changes in the flow of services of
natural and environmental assets, but less so when the task is
that of valuing the entire stock of natural capital. After briefly
reviewing the main problems associated with environmental
valuation when dealing with marginal changes in the flow of
natural services, the main objective of this paper is to deal
with something perhaps not that well known: to point out the
difficulties involved in valuing natural capital as a stock
variable. Even if at this stage we are unable to provide any
solution to the problem, it seems that, being aware of the
limits of this process is something worth remembering.
This paper is structured as follows. In Section 2, a brief
introduction is presented regarding the main aspects of
valuing economically environmental impacts in a marginal
and partial equilibrium framework. The problems associated
with defining and valuing natural capital depreciation, in the
context of sustainability requirements, are briefly dealt within
Section 3. Section 4 presents the main problem addressed in
the paper: the difficulties that appear when trying to estimate
the natural capital basis of a given territory in welfare terms. A
conclusion and final remarks follow.
2. The microeconomics of environmental
impact valuation
Within the moral framework of a human-centered environmental
ethic (Elliot, 1995, p.4) economic analysis provides different
methods to value the impact on social welfare of some
changes in the flow of goods and services that the biosphere
offers to humans, directly or indirectly. The fact that this value
is usually expressed in monetary terms does not imply that it
is the financial value which is of interest (adjusted market
prices will approach this value): it is only a convenient way to
express economic values, which relate not to the individual but
to the social welfare function (EPA, 2000). The choice of this
ethical framework is something that goes beyond the authors'
preferences: much more relevant, it has to do with the fact
that it is the one which is implicit in the methodologies we
want to analyse. Of course it would be possible to criticize
these methodologies from quite a different ethical or other
standpoint, as many authors belonging to the mainstream of
Ecological Economics do, but, apart from sharing this ethical
position, our interest is to identify the limits of the process of
economic valuation of natural capital, as it is conventionally
performed, accepting its main basic assumption regarding
what would be considered as morally acceptable with respect
to the relationship between the human species and the rest of
the biosphere.
Accepting this ethical framework, the first important
limiting factor in this process of valuation is the fact that it
should only be applied to those natural goods and services
that can be categorized as commodities: i.e., that have a non
intrinsic, instrumental value (Anderson, 1993, p. 144). Natural
assets that have a superior value (because, for instance, they
have been incorporated into the common heritage of a given
social group), or that are considered necessary to guarantee
sustainability (the asset itself, or some particular service it
provides), should be excluded from this valuation process
(Azqueta and Delacmara, 2006).
1
As for commodities, the
process of economic valuation is well known and could be
described as follows:
Humanactivities tendtohave animpact ontheflowof goods
and services that the biosphere provides: an environmental
impact. In theoretical terms, this impact should be amenable to
be valued in economic (not in financial) terms, by comparing
total social welfare with and without the activity itself. A first
approximation to this value is ready at hand: taking into
account that many of these natural services are captured by
economic assets as Ricardian rents, recovery costs could be a
good approximation to the economic value of these services.
Ricardian rents are just a reflection of the value people give to
the access to these services on their own personal welfare:
therefore, theeconomic costs of recovering these rents, oncethe
due proportionality clause is fulfilled, would be a good approxi-
mation of the economic loss entailed by the environmental
impact beinganalyzed.
2
This is, ontheother hand, theapproach
taken in the UN proposal for an integrated economic and
environmental accounting framework that will be mentioned in
the next section (United Nations, 2003). Appropriate measures
to return to the original situation, however, can very seldom be
found. Furthermore, the following problems make it necessary
to complete this method of valuation with some other
complementary approaches that focus on individual demand
functions rather than on asset's rents:
First, the fact that, in all probability, people usually have to
solve their optimization problem when acquiring the asset
in question, moving partially to a corner solution. The reason
is simply that the asset that captures Nature' services
usually is a commodity made of multiple characteristics
(e.g., a house, a piece of land), each one having its impact
on the final price of the asset. Yet, these characteristics
tend to enter the commodity in fixed quantities or, at least,
in quantities that are very difficult (costly) to change at will.
It would be a real miracle if for each and every attribute of
the composed commodity, the buyer was able to equalize
his or her marginal willingness to pay for it, with its
implicit price: surely she would prefer a little bit more of a
given attribute (proximity to school) in exchange for a little
less of some other (recreational areas in the vicinity). But
this tradeoff is rather difficult, the asset being located
where it is, and in finite numbers. On the other hand,
changing these assets tend also to have high transaction
costs (selling/renting one's house and buying/renting
1
Economic analysis may help discover the opportunity costs of
maintaining or preserving these assets. That is, the social welfare
sacrificed because of the need to allocate to this purpose a set of
real resources that would have allowed, having been used
elsewhere, to increase the amount of goods and services
produced. But this is something different from the value of the
asset itself in the case of non-commodities.
2
Due proportionality is a common sense requirement: it would
be inefficient to invest 100 in recovering an asset that provides a
flow of services that has a present value of 10. Yet it points out to
the existence of a problem (corner solutions) which will be dealt
with in a moment.
23 E C O L O G I C A L E C O N O M I C S 6 3 ( 2 0 0 7 ) 2 2 3 0
another one). Furthermore, even if at the moment of
purchasing the good, the buyer was able to reach an
equilibriumin all characteristics (thus, reaching an optimal
solution), the passage of time, together with the change
this introduces in some relevant variables (age, rent,
number of children), may mean that the original situation
of equamarginality no longer holds, because high transac-
tion costs still prevent the move to another, more
convenient, location, in view of the new value of these
variables. This is why, when computing the economic
value of some environmental impact, the analyst goes
beyond pure recovery costs, and applies some of the
methods that not only provide such an estimate, but,
more importantly, help to drawthe entire demand function
for the asset's services: hedonic prices, travel cost (random
utility models) and, of course, contingent valuation.
Second, the value of the damage (or benefit) caused when
altering the environmental functions of the biosphere, may
not be the same as the sumof losses and gains experienced
by losers and beneficiaries. The fact that an asset losses
partially some of its Ricardian rents means that compet-
itive assets will gain, or recover, an advantage in price: a
reflection of its acquisition of relative new rents. In a
context of competitive and well functioning markets, with
no transaction costs and instantaneous adjustment, the
final damage (or benefit) will be equal to the net sum of
changes in consumer and producer surpluses. If no
distributive issues arise because of the resulting distribu-
tion of benefits and damages, then one should not worry.
But when, as it is usually the case, markets are not perfect,
transaction costs are relevant, and adjustment to the new
situation takes time. Identifying and following all these
changes in consumer and producer surpluses may well be a
truly demanding task: partial equilibrium analysis will
have to make room for a much more ambitious general
equilibrium framework. We will turn to this problem in a
moment.
3
Apart from these two well known difficulties, when, as is
usually the case, economic valuation of environmental impact
takes place in the framework of a Cost Benefit Analysis, two
further problems appear, that are worth keeping in mind in
relation to the requirements of a rigorous specification of the
baseline scenario:
On the one hand, the necessity to specify carefully the
situation without the activity causing the environmental
impact. Occasionally this task may be more time and effort
consuming than the identification of the impacts them-
selves, if only because the analyst will usually have quite
an amount of basic information regarding the activity
under scrutiny, and its major impacts (the agent promoting
it being the first interested in providing this information,
even if, on occasion, with some bias); but very little related
to the alternative scenario, to the situation in the absence
of this activity. To give an example: oil extraction in a
tropical forest may entail an induced process of deforesta-
tion, because the new roads being opened to connect
worker camps, oil fields and pipes, will be used also by
would-be colonists that will enter the area through them
(Chomitz and Gray, 1996). Deforestation, of course, implies
a severe environmental impact. Yet, even in the absence of
these oil extraction facilities, deforestation would have
been taking place although at a slower pace: people would
have entered the area, anyway, through rivers (Cropper
and Griffiths, 1994). The true environmental impact due to
oil extraction, therefore, is only the differential deforesta-
tion rate between these two situations. A related case in
point, worth mentioning, is the employment generation
impact of many environmental investments. This is hardly
an environmental impact, but it is usually employed as an
argument in favor of either adopting environmental
enhancing measures, or economic activities that have
negative environmental impacts (e.g., tourism): they may
be costly, in financial or environmental terms but, the
argument goes, these measures create new jobs. This point
needs to be dealt with in some detail. Yes, these measures
will create newjobs, but the funds devoted to finance these
activities (public and private investment) have an oppor-
tunity cost: if not tied to it, they would have been used in
some other alternative investment, either public or private.
But if invested in this alternative project, they would also
have had employment generation effects. If these funds
were displacing consumption rather than investment, they
would still have an impact on potential employment via
aggregate demand. A properly performed Cost Benefit
Analysis should therefore compare the number of jobs
created by investing in the alternative under consideration,
with the number of jobs that public and private investment
creates, on average, in the economy. Furthermore: if
unemployment is a problem in the economy, the use of
efficiency wages when appraising these alternatives will
surely put a premium on those that contribute more to
solving it.
On the other hand, there is the difficulty of allocating
environmental impacts to the activity under consideration
(oil extraction) rather than to some other variables (e.g.,
agricultural policy). As mentioned earlier, oil extraction
causes a process of induced migration to the area.
However, the environmental impacts associated to this
migration flow depend on the kind of activity the settler
develops: whether he or she begins a forestry initiative, or
clears the land to cultivate or to rise cattle. If the land is
going to be cultivated, the kind of crop grown will also have
differential environmental impacts. Surely, some of these
decisions will depend on the characteristics of the land
itself, but some will also depend on a wide array of
economic and institutional variables: agricultural prices
and subsidies, foreign exchange policy, land tenure
arrangements, rate of interest, access to credit, etc. (von
Amsberg, 1998). It is really difficult to model how things
would have been with a different scenario in terms of these
variables, but it would also be probably unfair, to put the
whole burden of these negative environmental impacts
3
If the national entity was the reference framework for valuing
welfare changes, one should keep in mind that a part of these
impacts may go overseas and should not be taken into account.
This approach might be highly disputable, both ethically and on
grounds of consistency, but this is still the conventional
procedure.
24 E C O L O G I C A L E C O N O M I C S 6 3 ( 2 0 0 7 ) 2 2 3 0
just on oil extraction. Not to mention the fact that the
environmental impacts related to oil exploration, extrac-
tion and pumping, would be greatly diminished if instead
of opening new roads to carry on more easily these
operations, a more difficult and more expensive alternative
had been chosen: that of moving people and machinery by
air.
Be that as it may, and with these caveats in mind, there is a
more or less clear procedure with which value the loss of
welfare associated withenvironmental impacts, by identifying
the marginal change in the flowof services provided by a given
natural asset, and its associated instrumental, use-values.
Conventional economic instruments to value environmental
impacts, together perhaps with other type of methodologies
such as discourse-based valuation (Wilson and Howarth, 2002),
may provide then a very useful piece of information helping to
identify the social groups affected, changes in individual
welfare in relation to each of them, and the resulting change
in overall social welfare.
3. From micro to macroeconomics: natural
capital and sustainability
Moving away from this microeconomic process of economi-
cally valuing changes in welfare resulting from changes in
environmental and natural assets, a quite different problem
appears when trying to value, also in economic terms, the
stock of these assets: namely, the amount of natural capital.
There have been quite a number of attempts to take into
account environmental variables into conventional National
Accounting. Two of them are of particular interest for the
purposes of this paper: the World Bank genuine savings
construct (together with its expanded Measure of Wealth:
World Bank, 1997, 2005), and the United Nations proposal for
an integrated economic and environmental accounting framework
(United Nations, 2003).
4
A convenient theoretical framework within which to
discuss the problems associated with the measure of natural
capital is the one offeredby the concept of Hicksian income (Heal
and Kristrm, 2003). The concept associated with the name of
Sir John Hicks (Hicks, 1939), later formalized by Weitzman
(1976) and further elaborated by Solow (1974), Mler (1991),
Dasgupta (1993), Asheim (1997) and Hartwick (2000), among
others, relates to the amount of consumption (expenditure)
that can be financed during a given period of time, while
maintaining the amount of wealth of the agent at the original
level: the maximum amount an individual (a nation) can
consume during a period and remain as well off at the end of
the period as at the beginning.
5
Weitzman (2000) proved that, assuming linear utility
functions on consumption, this value can be obtained by
solving the following expression:
max
Z
l
0
u c
t
e
rt
dt
Subject to some dynamic restrictions:
d
K
t
F K
t
c
t
where u is the level of utility, c is the level of consumption; K
the stock of capital; F(K) the productionfunction; r the discount
rate; and a dot over a variable indicates its proportional rate of
growth. Taking c
t
as the control variable, and K
t
as the state
variable, this problem can be solved as a dynamic maximiza-
tion one, by constructing the corresponding Hamiltonian:
H u c
t
k
t
F K
t
c
t

(where is a set of multipliers), and verifying the necessary
conditions:
u
t
k
d
k rk F
k
k
plus the transversality condition.
6
The value obtained by solving this dynamic optimization
problem, the value of the Hicksian Income, is sustainable
through time, and offers an intertemporal morally acceptable
distribution of income.
7
However, to make sure that sustainability is guaranteed it
is necessary to properly take into account natural capital de-
preciation. The concept of natural capital is therefore of
paramount importance in this respect. To calculate depreci-
ation, F(K
t
) needs first to be specified in terms of its three main
components (produced capital, human capital and natural
capital: We omit here social capital, not because we consider it
unimportant, but because of the difficulties in measuring it.),
including any possibility of substitution between them.
This is the directiontaken by the World Bank when, trying to
estimate genuine saving rates, had to calculate a first approxi-
mation to the value of natural capital (World Bank, 1997, 2005).
The problem with this exercise, as it is well known and was
openly recognised, is that it assumed perfect substitutability
among all forms of capital and, therefore, could say very little
about sustainability as such: weak sustainability is no sustain-
ability at all, if there is no possibility of substituting certain
forms of natural capital.
4
See, on the same line, EUROSTAT (2002). A quite different
approach is the one that appears in those exercises that try to
elaborate Natural Resource Accounts, of which the French
experience was perhaps the most ambitious and, probably
because of this, was abandoned (Hecht, 2000). The same can be
said about the attempt to introduce environmental concerns into
the System of National Accounts through Satellite Accounts, as in
the NAMEA matrix in Holland (De Haan and Keuning, 2000). In
both these cases, however, there is not a real attempt to value
economically natural and environmental assets as natural
capital.
5
Karl-Gran Mler pointed out to us that it was really Lindhal
(1933) who first elaborated the concept.
6
A different way to solve the same problem would be to assume
that utility functions are not linear but have a linear component
related to the shadow price of changes in the stocks (Dasgupta
and Mler, 1995, 2000).
7
The concept of Hicksian Income, by the way, is very much in
line with Pezzey's definition of a sustainable economy as one
where the actions of producers and consumers do not diminish
the maximum level of human welfare that can be maintained
into the indefinite future (Pezzey, 1989, cited in Howarth and
Farber, 2002).
25 E C O L O G I C A L E C O N O M I C S 6 3 ( 2 0 0 7 ) 2 2 3 0
To guarantee sustainability something more than valuing
natural capital depreciation (if this were to be possible) is
required. The real problemhas to dowithidentifying the core
set of natural capital (where there is no substitution whatso-
ever and strong sustainability applies) and make sure that it is
maintained: Neumayer (2003), for instance, mentions a stable
climate, the concentration of stratospheric ozone and life-
support systems, as the main components of what he calls
critical natural capital. Furthermore, Turner et al. (2000) consider
that, in view of this life support function, the remaining
services should be considered as belonging to a secondary
level. Accepting the above arguments, once this core of natural
capital has beenidentified, there is no point intrying to value it
in economic terms: the problem is quite a different one.
8
We
do not ignore, of course, the complexities involved in trying to
cope with this task: our argument here is, simply, that this is
not a problem that has to do with the economic valuation of
natural assets, but with the possibilities of substitution
between natural capital and other forms of capital and,
therefore, it is outside the field this paper tries to cover.
Valuing natural capital in economic terms, and calculating
its depreciation rate makes sense, of course, when, there is
substitutability between different forms of capital, in terms of
sustainability. This economic valuation process will help to
better calculate growth rates, for instance, and therefore, to
solve intertemporal distribution problems in sounder
grounds. It will also contribute to calculate more accurately
the amount of wealth a society has, and how it is distributed
among different assets. Again, this is the second mainresult of
the already mentioned World Bank exercise in valuing natural
capital. Nevertheless, it is worthwhile looking in some detail
at several problems that appear when trying to estimate the
economic value of a given stock of natural capital.
4. From micro to macroeconomics: natural
capital and social welfare
The possibility of measuring in economic terms the stock of
natural capital present in a givenarea is a very tempting one. It
will not only inform about the amount of wealth present in a
given territory, but also help the decision maker to solve some
very familiar problems regarding changes in the use of land,
for instance.
Ideally, applying the methods that discover the economic
value of a given set of services provided by environmental and
natural assets (hedonic prices, travel cost, contingent valua-
tion and so on), and coupling it with the corresponding
Geographical Information System that informs about the
different quantities and characteristics of those assets present
in the territory, it should be possible to obtain a set of maps
expressing the value of each component of the natural capital
present in this territory: once the set of different natural and
environmental resources present has been identified, and
once a compatibility matrix regarding different, and in some
cases incompatible uses, has been constructed, the analyst
only has to apply the methods mentioned above to the set of
compatible uses that maximizes social welfare. The net
present value of these flows will be the capital value of the
natural and environmental resources present in the territory.
9
This way, the decision making process regarding territorial
planning would be greatly improved: local authorities would
have a broad estimate of the economic value sacrificed if, for
example, an extension of wild territory is transformed into
agricultural land, tourist resort or urban development, once
everybody agrees that this conversion does not put injeopardy
overall sustainability (i.e.: it does not belong to the core of non
substitutable, critical natural capital). In the same way, it
would be possible to value the loss caused by a fire and,
accordingly, decide, for instance, upon the corresponding
penalty, or about the optimum level of investment in terms of
fire prevention and extinction.
Things however, are not that easy.
To begin with, there is the problem of clearly identifying
the set of natural and environmental resources present in the
area: natural resources, land and ecosystems. Surely, renew-
able and non renewable resources will be included. Also
landscape, water, a given quality of air, biodiversity, entire
ecosystems But what about the number of sun hours?
Average temperature? Wind regime? Orography? Of course
they have an economic value (for instance, in terms of
producing energy) and, consequently, they should probably
be included among the natural capital of the region. Even if
there is little policy makers can do about it, in terms of
modifying it (either enhancing or depleting these environ-
mental resources), they can prevent taking advantage of their
presence (for instance, giving permission to build an infra-
structure that collides with an eolic park).
Secondly, there is the problem of, when confronted with
the task of valuing the natural capital of a given territory, what
situation to choose: the actual one, even if nothing guarantees
that it is the best, or a new, theoretical one, in which the space
has been optimally allocated? The first one has the advantage
of relying on what is observable and measurable, and it is the
one recommended in the literature (see, e.g., Pagiola et al.,
2004), but little more can be said in its favor.
Even if these two problems have been solved one way or
another, the process of valuation will be fraught with
difficulties, because the methods that are well suited to
value marginal changes in the flow of services provided by
8
The discussion of sustainability indicated that there are
different views about how wealth should be measured, that is,
whether all forms of wealth can be measured in monetary terms
(weak sustainability) or in some combination of monetary and
physical units (strong sustainability) (World Bank, 2005, p. 128).
Yet, the measurement of genuine savings as performed by the
World Bank, is also controversial: see, e.g. Pillarisetti (2005) with
respect to its implications for sustainability.
9
Social discounting is a really difficult matter. Because of the
long periods of time involved when dealing with environmental
issues, hyperbolic discount factors have been recommended both,
on ethical grounds (Chichilnisky, 1996; Heal, 1998), and as an
expression of professionals' preferences (Weitzman, 2001). The
problem is further complicated in developing countries where, as
it is usually the case, the rate of savings is suboptimal,
investment is at a premium, and the accounting rate of interest is
higher than the consumption rate of interest. Being aware of these
difficulties we cannot but mention them here.
26 E C O L O G I C A L E C O N O M I C S 6 3 ( 2 0 0 7 ) 2 2 3 0
natural and environmental assets are going to be clearly
insufficient in this new framework: much more is going to be
required. There are various reasons for this. On one hand,
because of the fact that many of the assets present in a given
territory produce a flow of services whose value (and may be
even its existence) depend on the presence of others. On the
other hand, because some of these services may have
available substitutes inside the same territorial unit.
To illustrate this point, it will be of some help to draw the
following parallel. Suppose you are asked to discover the
economic value of the natural capital present in, say, a
perfectly delimitated forest. Probably one of the first things
you would do is to enter the forest and see what there is inside,
making an inventory, and begin associating some economic
value to the different assets you find. To help understand this
process, suppose instead that it is not a forest what you have
been commissioned to value, but the capital value of a clearly
delimited urban area: a small city. The process will be the
same, but in this case we are more at ease in terms of valuing
buildings and infrastructures: this is something economic
analysis does frequently.
Lets then begin your little walk through the city. To make
things easier, you have the company of a friend of yours who
works in a real estate firm, with whom you will be able to
discuss about the value of the different components of the
urban landscape (buildings, houses, infrastructures), that you
find in your way.
The first thing you encounter is a three storey, 15-year old
building, in which there is a little grocery shop at the street
level, a lawyers' office on the first floor, and family apartments
above. Being an expert, your friend will have no difficulty in
telling us the financial value of the building. Furthermore,
ideally, this value will be the same as its market price. The
reason behind this market value, the value of the asset, is
straightforward, and has been already mentioned: the asset
(the building) provides a flow of services that people value
and, because it is a private commodity, the owner can exclude
anyone from enjoying it. This means simply that people have
to, and are willing to pay for the access to these services an
amount of money whose net present value is the price of the
asset. In other words: the services the asset provides, a given
space at a given location to live, trade or develop a business,
fulfill private needs whose importance is reflected in the
amount of potential welfare people are prepared to sacrifice by
paying this price (the expected welfare provided by the set of
goods and services that would have been available, have this
amount of money not been devoted to rent the apartment or
the commercial space).
The parallel with the natural world is straightforward:
some components of the forest, assets that you will find when
walking through it (e.g., trees), also provide services that have
an economic value: wood and non-wood products, carbon
sequestration and storage, etc. that, also being private goods
(at least potentially), can be valued in the same way. This was,
incidentally, the approach first adopted by Peskin (1976) with
relation to natural capital and, with minor amendments, also
followed by the World Bank (1997, 2005). As for other services
also present in trees, like protection against wind and water
erosion, amenities or landscape provision, that fall within the
realmof externalities, the above mentioned methods (hedonic
prices, travel cost, production functions and averting behav-
iour, etc.) will be of great help in finding its economic value.
The walkhas startedthenunder very promising auspicious.
The next building that appears in your way is a small and
very nice XIX Century romantic mansion. Now, your friend
finds it somewhat more difficult to give a value to this
property. The reason is, she explains to you, that there are
severe restrictions on the use of the building, being, as it is,
protected under some convenient legal figure (e.g.: historical
heritage). There is a clear asymmetry involved here, she points
out: the building has a price (anybody could buy it paying this
amount, if for sale), but cannot be demolished to build
something else in its place, neither can it be heavily
transformed. This market price cannot then reflect the value
of the building itself (the loss of it disappearing would not be
compensated by this amount of money): it only reflects the
value of some of the services it provides, a part of its use-value.
Besides this instrumental, use-value, this building has also a
non-instrumental, non-use-value, and this is the reason for it
being protected. Unfortunately, however, economic methods
of valuation cannot determine the total value of this asset, but
only a part of the services it provides, the one related to in-
strumental values. The second one is invaluable in economic
terms, in the sense that preferences are lexicographic: first
preservation, then use (see Spash and Hanley, 1995, for a very
close and relevant analogy). These methods will be able then
to inform about changes in social welfare associated to
marginal modifications in this flow of services, both to users
and non-users (for instance, whether the building houses a
municipal library, a fashion shop or a fast food facility), but not
about its entire value as an asset.
10
Again, the parallel with the forest, or any other natural
ecosystem, is very clear. Many of them will have, besides the
use-values mentioned in the previous paragraph, a set on non
instrumental, non use-values, that prevent us from approach-
ing on an equal footing the process of estimating their entire
economic value.
If this is so with a little nineteenth century palace, what
could be said about the magnificent Gothic cathedral near by?
Our friend's look gives little room for doubt: surely you are not
going to ask me about its economic value, are you? We are
both sensible citizens and, yes, we will not dare to pose such a
question. Even if the cathedral has also a use-value that finds
its price in the market: not far away the Church of Jesus Christ
Latter-day Saints is renting a local (and therefore, paying a
price), to provide a service whichis essentially the same as one
of those offered inside the cathedral.
But even accepting that there is no point in trying to value
economically this asset, there is still one question the
economist should be able to answer: namely, what is the eco-
nomic impact of the cathedral's existence upon the local
economy, in terms of jobs created and maintained, both
directly and indirectly; taxes paid, etc. This is, of course, not an
easy question to answer, but does not pose insurmountable
methodological problems: it is rather a matter of careful model
10
The World Bank values protected areas using a per hectare
value that is the minimum between that for cropland and
pastureland (World Bank, 2005, p. 165). This is surely a minimum
value, not the complete value of protected areas (ibid.).
27 E C O L O G I C A L E C O N O M I C S 6 3 ( 2 0 0 7 ) 2 2 3 0
design and access to information. But, should we consider
these economic impacts on the local economy, as a part (even
if a minor one indeed) of the cathedral's total economic value?
They surely help to satisfy human needs, and have therefore a
positive impact on social and individual welfare. On the other
hand, should the cathedral disappear, for whatever reason,
they would also vanish. Yet, what is true of the local economy
(and partial equilibrium analysis) may not be so at a more
general level. It may be the case that, with the necessary time
adjustments, the flow of visitors that the cathedral attracts,
and that explains this economic impact, is now redirected
towards different and competing locations inside the country.
Our city loss is someone else's gain.
Nature, of course, also has some cathedrals that have
substantial non-use-values, but that have quite an important
role on the local economy. There is no point in trying to
estimate their entire economic value, the most important part
of it not being amenable to be reduced to monetary terms. But,
apart from this, the same problem will appear: should the
potential positive economic impacts upon the economy be
considered as a part of its capital value?
In more general terms: even if we are able to value the flow
of services that this natural asset provides (a beautiful beach,
or a unique fall), its capital value may be something different
from the present value of this flow. Were it to disappear, what
would be lost? Something slightly different from the present
value of this flow of services:
First, because of its uniqueness (and this is a very relative
concept), a set of non use-values that we will not be able to
estimate in monetary terms.
Second, the value derived from the services it provides in
terms of use-values (commodities) that are site-specific and
have no substitutes within the same territorial area:
protection against erosion or sea disturbances, a beautiful
view, etc. These values can be calculated with the help of
such methods as averting behaviour, hedonic travel cost
and/or random utility models, hedonic prices, etc.
Third, the use-values derived fromservices that have available
substitutes even if at a higher price: resource stocks, some
amenities. In this case, only the avoided costs of moving, and
adapting to a new location will have to be considered, taking
into account the difference between costs and benefits, and
losers and beneficiaries pointed out at the beginning.
Fourthly, the multiplier effect that the presence of the beach,
and the associated production and distribution activities it
entails, may have on the local economy (the so-called Factor
Income, Faber et al., 2002). The value of this Factor-Income,
if considered as a part of the resource's total economic
value, will have to be calculated in the context of a general
equilibrium model, where the existence of competitors and/
or substitutes will play a relevant role.
In the two latter cases, the capital value of the asset is not
the present value of its flow of services, but the present value
of the avoided costs of obtaining these same services at a less
convenient location, plus the value in terms of social welfare
of the distributive impacts of having the multiplier effect
somewhere else.
Finally, there is a small component of the urban landscape
that you will find in your walk, also worth mentioning: the
street lamp. What is the economic value of a street lamp?
What would be lost if, for instance, somebody breaks it? The
answer could be, simply, the cost of replacing it plus the
inconveniences of having no light during the repair period:
nothing different from the recovery costs and compensation
for the damage while things return to its original situation,
already mentioned. But what if, because of some works
incompatible with its presence, the street lamp disappears
forever? Well, in this case, it would be the loss of welfare
associated to this no longer available service: having no light
at night in the spot covered by the lamp. Surely there will be
other street lamps close to the one that disappeared, so this
loss will not be that great (some people may even prefer the
new situation). To push things a little further: what if, now, it
is not just one lamp that disappears, but all lamps in the
street? Now the valuation problem begins to complicate itself,
because the value of other assets (for instance: houses and
business in the vicinity) will also be affected. There will
probably be also some induced changes in the area: people will
move in and out, some business will leave the zone whereas
different ones will enter it, etc. When, if instead of all the
street lamps of a given avenue, we try to value the welfare loss
caused by the perpetual disappearing of all street lamps in the
whole city, these difficulties will grow exponentially. The
whole social, economic and physic morphology of the urban
area will change.
Yet, this is exactly what happens when trying to find the
economic value (and then, its capital value) of a given species
within an ecosystem. If we try to value just one member of the
family (e.g., an owl), the problem will be minor. But if what we
are looking for is the economic value of the species as a whole,
not in the planet, but just on that particular ecosystem (the
forest), the task will be fraught with difficulties.
11
Note that we
are not dealing with any threatened species: there are millions
of street lamps on earth.
What this simple example is pointing at is the difficulty of
moving from the individual to the whole, from the economic
value of a particular asset to the capital value of a whole area.
The value of any asset's services depends upon other assets'
services, and therefore its capital value depends on the
presence, and characteristics of these other assets. This is
true of the street lamp, the nineteenth century palace, the
cathedral and the three-storey building: their value depends
on the vicinity of the rest, as hedonic prices will immediately
show. In the case of natural assets, this fact is aggravated
because of the non-linearity of ecosystemservices availability,
and the existence of Critical Thresholds (Faber et al., 2002).
You have finished your walk. With the help of your friend
you have been able to identify, and to value, almost all services
encountered and, therefore, the different assets that, together,
made up the city. From this little experience, the question is
11
Ecosystems are complex, nonlinear systems that are only
metastable: that is, we cannot predict precisely where the
bifurcation (rapid shift from one stable state to another) will
occur, nor can we predict the magnitude and direction of the
change. Traditional valuation under these circumstances is risky
at best (Limburg et al., 2002, p. 416).
28 E C O L O G I C A L E C O N O M I C S 6 3 ( 2 0 0 7 ) 2 2 3 0
simply: are you able to tell the whole value of the city, even
accepting that we are only concerned with use, instrumental
values? Is the capital value of the forest the sum of the
individual values of its different components, including
externalities that affect other ecosystems? Would it not be
true that even a minor reorganization of the city, moving the
market to a new place, closing a street to cars, will change its
entire capital value? Would it not be true that its entire capital
value will also depend on the presence and characteristics of
other, complementary and substitute, ecosystems?
5. Conclusion and final remarks
Economic analysis provides several methods to estimate the
economic value of different services offered by natural assets.
These methods are able to discover changes in social welfare
associated to marginal changes in this flow of services, usually
in a partial equilibrium context. The capital value of some of
these assets is something more difficult to arrive at, because in
many cases, non use, superior values, appear together with
instrumental, use values, which are the ones discovered by the
methods mentioned. Another, and different problem, is the one
posed by the presence of positive economic impacts (e.g.,
multiplier effects) related to the natural asset, and its eventual
inclusioninits capital value. Finally, movingfromthe individual
economic valuationof singular natural assets to discovering the
capital value of a given natural area is something more
complicated that just adding up these individual values. The
reason is simply that, in this case, there are two problems that
complicate to a great extent the valuation process:
First, the problem of substitutability: i.e., the fact that many
of these assets provide services (e.g., amenities, multiplier
effects), that may have readily available substitutes.
Second, the interrelationship between the value of a single
asset (a river) and the value of related ecosystems and other
natural assets (a beach that is fed by the sediments carried
by the river, a forest that provides water to the river itself).
Estimates of the natural capital of a given region, as those
provided by the World Bank, should then be taken very
carefully. If its main objective is to warn about negative rates
of genuine savings, they are quite acceptable. However, if they
are meant to inform policy decision making processes about,
for instance, territorial planning and development, the
problems mentioned above will appear immediately, calling
for a much more complex exercise than just adding different
layers of value, each corresponding to some specific service, to
a given piece of territory.
Last, but not least, the analyst should not lose sight of the
fact that even the very structure of the demand on nature'
services and, therefore, their implicit economic value, will
change withthe level of socioeconomic development achieved
by society. What now is just a natural resource that has an
instrumental, use value, may be awarded tomorrowa superior
value and thus become part of society's common heritage.
Several decades ago the people of the city where we live used
the last remnants of the Arab fortress as building material for
their houses. Even if this is something people of all ages and
cultures have been doing for centuries, today it would be
unconceivable. Stones, as an economic resource to build
house, were easy to value economically. These same stones,
as part of a historical asset, have a superior value and should
not be valued in economic terms.
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