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Please note - This information on valuation is taken from a variety of sources and was written based on research completed by a wide variety of academics and practitioners.  

People make a variety of uses of nature. Economists generally distinguish between the economic values associated with the “direct use” of nature (e.g., in the form of fishing, hiking or timber harvests) and those derived from “passive” or “non-uses.” Direct use values are the result of the immediate interaction with a particular ecosystem, while passive use values derive from the mere appreciation of the existence of a particular ecosystem, landscape or species, or the knowledge that they are stewarded and bequested to future generations, and are independent of any direct interaction with the species or landscape in question. The distinction between direct and passive use values is based both on the recognition that the two represent distinct types of values, and that they require different approaches for their quantification.

The benefits people derive from nature often are referred to collectively as “ecosystem services.”  Various definitions and classifications exist of ecosystem services.  For purposes of economic valuation, it is often useful to focus on final, or end-product ecosystem services, defined as discrete and countable, final outputs from nature that directly contribute to human well-being by providing specific and discrete benefits (e.g., gallons of drinking water, board feet of timber, tons of fish). This avoids the problem of lumping together and thus double-counting ecosystem functions, services, and benefits. It also facilitates the comprehensive cataloguing of the services provided by a particular ecosystem.

Valuation often (though not always) is a necessary (though not sufficient) condition for the commodification of ecosystem services (i.e., their transaction in markets or payment programs). However, neither the valuation nor the commodification of an ecosystem service through markets or payment programs guarantees the conservation of that service, for two reasons.  First, due to information and institutional constraints, currently it is not possible to establish markets or payment programs for all of the services provided by a given ecosystem. As a result, the total market value of the services provided by a given area currently is far below the total economic value of those services. Second, even if all of these services could be valued and marketed, the market value of conservation-incompatible uses may exceed the ecosystem services value of the area, making conservation non-competitive and conflicting uses. Nevertheless, the valuation and commodification of ecosystem services in some cases may generate enough additional income for a land owner to make conservation-compatible land uses competitive with incompatible uses. Thus, ecosystem services valuation and commodification should not be seen as the silver bullet for conservation. Rather, they represent additional tools, more powerful in some situations than others, that can help achieve conservation objectives in specific cases.     

The complexity of ecosystem service valuation varies among different services. Two broad approaches can be distinguished: revealed preference approaches that rely on people’s observed behavior and use market prices to value ecosystem services; and stated preference approaches that ask people directly about their willingness to pay for a specific service or bundle of services. In cases where services have mostly direct use values and are traded in markets (e.g., timber, water), market prices often can serve as the basis for valuation. When the service itself is not traded in markets (e.g., recreation) but requires inputs that are traded (e.g., gasoline, time, entrance fees, lodging), those inputs provide a lower bound estimate of the value participants assign to that service. In both of these cases, revealed preferences as observed in the form of market prices do not capture the “consumer surplus” associated with those services, that is, the additional amount consumers would have been willing to spend beyond what they actually spent. Studies show that for some nature-based activities such as wildlife viewing, fishing, hunting or hiking, this consumer surplus can be equal to people’s actual expenditures. It is thus crucial to include this value component in value estimates.

Estimates of the value people assign to ecosystem services that carry important passive use values (e.g., cherished species or landscapes) can only be generated through stated preference approaches. These take the form of surveys that ask people directly about their willingness to pay for preserving those services.    

Sources and Readings for Further Information

Boyd, J. and S. Banzhaf. 2007. What are the ecosystem services? The need for standardized environmental accounting units. Ecological Economics 63:616-626.
Brown, T.C., J.C. Bergstrom and J.B. Loomis. 2007. Defining, valuing and providing ecosystem goods and services. Natural Resources Journal 47:329-376.
Daily, G.C., 1997. Introduction: what are ecosystem services?. In: G. Daily, editor. Nature's Services: Societal De-pendence on Natural Ecosystems. Island Press, Washington, D.C., pp. 1-10
EPA Science Advisory Board. 2009. Valuing the Protection of Ecological Systems and Services. EPA-SAB-09-012. May 2009.
Fisher, B. and R.K. Turner. 2008. Ecosystem services: Classification for valuation. Biological Conservation 141:1167-1169.
Kroeger, T. and F. Casey. 2007. An assessment of market-based approaches to providing ecosystem services on agricultural lands. Ecological Economics 64(2):321-332.
Millennium Ecosystem Assessment. 2005. Ecosystems and Human Well-Being. A Framework for Assessment. Washington DC: Island Press.
National Research Council, 2005. Valuing Ecosystem Services. Toward Better Environmental Decision-Making. National Academies Press, Washington, DC.
Turner, R.K., S. Morse-Jones and B. Fisher. 2010.  Ecosystem valuation: A sequential decision support system and quality assessment issues. Annals of the New York Academy of Sciences: Ecological Economics Reviews 1185(1):79-101.