Developing markets for ecosystem services from peatlands
Nick Hanley
Professor of Environmental Economics
University of Stirling
'Investing in Peatlands - Delivering Multiple Benefits' Conference
Or:
Can economics “save” peatlands?
Declines in peatlands globally
• Often the result of market forces• Example: palm oil demand and peat swamp forest loss in SE
Asia• Overall rate of loss about 60% (Miettinen et al, 2011)• Private benefits (value of conversion) drive this, but many
of the social and environmental costs of land conversion do not get taken into account in land use management
• This will only change when either ecosystem markets and/or government policy bring about a financial reward for the environmental and social benefits (eg biodiversity values, avoided GHG emissions) of peatland conservation and restoration.
UK National Ecosystems Assessment (for MMH):• Last 100 years: decline in quality and area of peatlands in UK• Main drivers: grazing pressures, forestry, housing/roads (lowland
heath), air pollution (SO2 and N deposition), burning.• increased levels of peat erosion, loss of structural diversity,
decreases in species richness and an expansion of grasses at the expense of moss and dwarf shrub-dominated communities.
• Again, loss/deterioration is the result of market forces sending the wrong signals to land owners and land managers (lack of financial return for economic benefits of peatland conservation and restoration)
• and due to un-priced externalities elsewhere in the economy impacting on peatland loss (eg air pollution from industrial activity and transport)
For the UK..
Whether in the UK or Indonesia or Eastern Europe….
Reversing this trend of loss requires:
• Rewarding landowners for more of the benefits of peatland conservation
• Correcting market failures elsewhere in the economy which have negative impacts on peatland quality
• Recognising the multiple benefits that peatlandscan deliver in land-use planning and in policy design. (UK NEA)
How can economics help here?
1. making the case for conservation
2. Design of more cost-effective policies for conservation
3. Development of markets for ecosystem services
None of this guarantees a better future for peatlands. But it does make a better future more likely.
1.MAKING THE CASE FOR CONSERVATION
Making the case for conservation
• Now much more widely recognised that conservation generates economic benefits, even if these do not show up as market values
• Idea of Cost-Benefit Analysis
• Compare benefits of conservation with opportunity costs over a given time period
• Focus on changes in ecosystem service flows over time
Economic values for peatlands
• Main problem – a lot of the benefits of protecting peatlands are not priced by markets, and so do not show up in financial returns
• Outdoor recreation, biodiversity, scenic values
• People may get utility from habitat protection even if they never visit the area
• Development of a suite of methods for estimating the monetary equivalent of these values, based on the standard economic concept of value – willingness to pay measured using both revealed and stated preferences
• Again, focus on marginal changes in value flows – not on total values.
Values for ecosystem services
• Post Millennium Ecosystem Assessment, discussions of economic values of protecting habitats increasingly put in terms of values of ecosystem services
• Ecosystem services provide direct or indirect benefits to people
• Examples: flood mitigation, water quality maintenance, air pollution filtering, recreation, carbon storage
• Mix of market- and non-market values
Ecosystem services of peatlands in UK NEA
• Livestock Products• Game• Peat extraction – being phased out in UK• Drinking Water and Pollution Treatment• Natural Hazard Mitigation• Biodiversity • Landscape values (cultural heritage) • Carbon• RecreationWe were not able to put ££ values on all of these –
science and economic evidence base is too limited
Examples of how values generated for peatlands
• Value of walking
travel cost models
• Value of biodiversity and landscape
contingent valuation and choice experiments
• Value of carbon sequestration and water
quality maintenance avoided costs
• Value of grouse hunting market prices
• Likely importance of non-use values for
unique areas subject to irreversible threats
contingent valuation.
• Currently working on economic benefits (and costs) from changes to landscape and birds from less intensive grouse moor management.
• We have also produced benefit estimates for alternative ways of conserving hen harriers and golden eagles on moorland on managed shooting estates
(Hanley et al, Ecological Economics, 2010)
Comparing costs and benefits of peatlandsprotection
• Economic framework of Cost-Benefit Analysis
• Protecting habitats has many benefits: for example, recreation values, biodiversity values, scenic values
• We can now estimate what these are “worth” in ££s
• If development occurs, then these benefits might be lost for ever “irreversibilities” (Arrow and Fisher, 1974)
© SNH
Costs of preservation
• But protecting peatlands also has costs – in particular, opportunity costs
• These are the benefits that we forego by NOT “developing” an area.
• e.g. forestry, quarrying, wind farms, more intensive grouse management….
• Society incurs the costs of foregone incomes from development in deciding to protect areas
• In cost benefit analysis, we compare these costs with the benefits of wilderness protection, and ask which management option gives the biggest net benefit (= benefit – cost)
An example
• 1970-1990: afforestation is increasing in the Flow Country, encouraged by tax incentives
• Flow Country: – One of Scotland’s outstanding
ecosystems– 184,000 ha. of core blanket bog
• Viewed as important :– For its flora – As a large example of a hydrologically-– linked complex system – For its visual quality, – For waders such as greenshank and
dunlin
• Paleo-ecological evidence suggests tree cover was always rather limited
© SNH
© Highlandwildcat.com
• Technological advances and tax concessions
resulted in planting by private forestry
companies using non-native conifers, although
most land in wind-throw categories 5 and 6
• This was thought by conservationists to damage the status of the Flow Country:– due to effects of drainage
– effects on birds
– impacts on water quality
• Hanley and Craig (Ecological Economics, 1991) undertake a cost-benefit analysis of afforestation, comparing benefits of preservation with benefits of development
© scienceblitz.com
© RSPB
• Pt – benefits of protection. Estimated using contingent valuation. Gave aggregate value of £3.9 million per year, for the Scottish population
• Dt – benefits of development. Estimated using projected real timber prices for 40 year rotation and a land price of £400/ha.. Excluding grants and tax credits, this gave a negative net present value for planting
• Taking account of protection benefits makes this even more negative clear economic conclusion is that planting was not efficient for society
• And that subsidising planting in this instance could not be justified on economic efficiency grounds
• However, CBA of habitat protection does NOT always come up with the “right” answer for conservation….lowland heaths
Another example: Costs and benefits of renewable energy schemes• Some types of renewable energy investments could have big
impacts on peatlands,
e.g. Hydro, wind
• Balanced against other environmental aspects, and effects on electricity prices
• Evidence from “choice experiment”: Bergmann et al., 2006.
Sample = Scottish public.
© Sundancerrenewables
option example
Plan A Plan B Neither
LANDSCAPE visual impact caused by
location and/or size HIGH NONE No increase in
renewable energy
Alternative
climate change
programs used
WILDLIFE health of habitat SLIGHT HARM SLIGHT HARM
AIR POLLUTION NONE NONE
EMPLOYMENT new jobs in local community 8-12 JOBS 1-3 JOBS
North Sea gas
fired power
stations instead
£
PRICE OF
ELECTRICITY
additional rates per year
£16
per year £7
per year
YOUR CHOICE: (please tick one only)
A B I would not want
either A or B
Choice experiment sample card
Scenario: Base Case A B C D
Fossil Fuel power station expansion
Large Offshore Wind farm
Large Onshore Wind farm
Small Onshore Wind farm
BiomassPower Plant
Attribute Levels:
Landscape impacts
Low None High Moderate Moderate
Wildlife impacts
None None None None Improve
Air Pollution Increase None None None Increase
Employment –no. of new jobs
+2 +5 +4 +1 +70
Welfare Change (£/hsld/yr.):
+£6.60 -£19.40 +£2.40 +£4.60
Welfare Change for Alternative Energy Projects
• Such analysis can show that renewable energy investments that seem best on financial grounds are not preferred on social cost-benefit analysis criteria.
• Implies government should re-align incentives to get this recognised in private sector decisions; or take environmental costs and benefits into account in granting planning permission.
2. MAKING CONSERVATION MORE COST-EFFECTIVE
2. Making conservation more cost-effective
• Important given limited public budgets for conservation policy (eg agri-environment schemes)
• Goal: Maximising conservation benefits delivered per £ of public spending
• Key feature: costs of conservation actions vary both across landowners (variations in opportunity costs, egas reflected in land prices) and for increasing scale of conservation actions by individual landowners
• whilst the potential of land managers to deliver environmental benefits varies across space in a way which is not known for sure by the regulator
• Offering uniform payments over-rewards/over-compensates all but the “marginal” farmer who takes up the scheme
• Implies much bigger costs for a given “quantity” of conservation actions.
• Our work in the Peak District showed that each £ of public spending on agri-environment schemes over-compensated farmers on average by 50% to 88% for income foregone
• Not un-common finding in literature
How to make schemes more cost-effective?
• Spatial or farm-level targetting in terms of £ per unit of environmental output sounds sensible
• But many of the costs of participation are hidden from government/agencies
• Land prices do not tell all.
• So need a mechanism which (i) reveals this cost information and (ii) results in payments which better reflect true “supply price” of conservation
How to make schemes more cost-effective?
• One approach to this is the conservation auction (Stoneham’s “bush tender”)
• Quite a lot of experience now with such schemes in Australia and US
• But several problems still to be solved: evolution of bids over time; transactions costs; metrics for environmental benefits delivered by individual bids; spatial coordination
We could also improve the cost-effectiveness of schemes by..
• Recognising spatial variations in supply prices and ecological benefit potential.– Our work in the Peaks also shows that designing
payment rates which vary spatially according to variations in supply price also produce big improvements in efficiency
• Paying for environmental outputs rather than changes in management actions– But this has higher transactions costs, and risks are
shifted onto farmers developments in China for soil conservation programmes.
3. DEVELOPING MARKETS FOR PEATLAND ECOSYSTEM SERVICES
3. Developing markets for peatlandecosystem services
• We have already noted that many of the ecosystem services provided by peatlands do not have a market (financial value)
• Water quality maintenance; carbon storage and sequestration; recreation; biodiversity
• This means that land owners and managers face the “wrong set of price signals” from the viewpoint of social well-being, since they do not get rewarded by the market for producing these services
• Eg no pay-off from storing carbon, or for beautiful landscapes, or for inputs to water quality.
What makes a market for ecosystem services?
• Main problem: what is being supplied is often non-excludable and non-rival in consumption
• Means private market under-supplies
What makes a market for ecosystem services?
Either:
• Government creates a market for example by setting constraints on land management or land conversion wetland banking and offsets in US. Some interest in Commission and in UK White Paper.
• Government acts as the buyer on society’s behalf (agri-environment schemes)
• Buyers become able to “capture” more of the benefits of ecosystem services supplied by the actions of others eg eco-labelling schemes for palm oil.
“Buyers are able to capture more of the benefits of
ecosystem service”
• Eg water company able to directly benefit from less polluted water supplied (Yorkshire water, UU?)
• Eg transport company able to offset emissions of CO2 by paying for wetland restoration
• Eg more general markets in carbon stored in/sequestered by peatlands
(for more on all the above, listen to Mark Reed’s talk)
• Eg conservation organisations act on behalf of members to buy biodiversity improvements (eg RSPB) or buying “wilderness quality” (eg John Muir Trust)
Issue of who benefits and who provides
• Spatially differences with implications for what kinds of ecosystem market might emerge, and how payment flows are directed
• Fisher et al, 2009, Ecol.Econ.
Spatial relationships between buyers and sellers
Type 1: ??
Type 2: recreation
Type 3: water quality
Type 4: mangroves/coastal fisheries (eg in Thailand); storm protection.
• But markets for ecosystem services, eg for carbon, could also offer incentives to degradepeatlands eg by tree planting, depending on carbon productivity of different land uses.
• May well be trade-offs between supply of some ecosystem services.
So economics can help conserve peatlands.
• Making the case for conservation
• Design of more cost-effective conservation policies
• Development of markets for ecosystem services
• Other arguments could also be made eg value of information about past landscapes stored in peatlands; value of measuring ecosystem resilience to previous shocks.
More information
Hanley N and Barbier E (2009) Pricing Nature. Edward Elgar Publishing.
www.management.stir.ac.uk/about-us/economics
Thanks to Aletta Bonn and Mark Read.