Payments for Ecosystem Services: Who Sets the Price?

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Though known for millennium that nature provides multiple benefits, the idea of ecosystem services and payments for these services has become more prominent in the last two decades. It is exciting to see nature’s values integrated into the market which helps people realize the full costs and benefits of production and consumption decisions.

Many ecosystem services are not bought or sold and because property rights are not well specified on them it is difficult to do so. These are considered non-market goods; no market price exists.

There are some intriguing new models to help calculate nature’s value. At a site-specific scale these may assist policy makers in making decisions at the margin. But accurate valuation is difficult and policy must address the complex interrelationship of economic and ecological systems.

A forest example can help explain. It has long been understood that forests provide many benefits from wood products and recreation to habitat, water flow management, and carbon sequestration. Historically, timberland managers focused on wood products. Over time recreation value became apparent and its provision increased. Recent policies have proposed carbon credits to preserve forests for sequestration.

Creating arbitrary prices for ecosystem services, such as carbon, however, can have secondary consequences. A 15-research institute consortium, known as CORRIM, has analyzed the life cycle of wood products and the impact of forest carbon credits. They have found that motivating more forest preservation through carbon credits can lead to the substitution of wood building products with fossil fuel intensive products resulting in an increase, rather than a decrease, in overall atmospheric carbon.

I do not want to suggest that all ecosystem valuation is harmful, it may be better than allowing environmental degradation to take place. And payment for ecosystem services is more appealing than prescriptive regulations. Valuation provides a framework for integrating these non-market goods into the market.

Markets can and do protect environmental quality given the proper institutions. It is the lack of property rights that make valuing nature so difficult.

Originally posted at Environmental Trends.
Holly Fretwell is a Research Fellow at PERC and an adjunct instructor at Montana State University where she has taught  introductory economics, macroeconomics, natural resources and environmental economics. She works with the Foundation for Teaching Economics, giving workshops for  high school teachers to improve their skills in teaching and...
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