VALUING ECOSYSTEM SERVICES

TOWARD BETTER ENVIRONMENTAL DECISION–MAKING

Committee on Assessing and Valuing the Services of Aquatic and Related Terrestrial Ecosystems

Water Science and Technology Board

Division on Earth and Life Studies

NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES

THE NATIONAL ACADEMIES PRESS
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Valuing Ecosystem Services: Toward Better Environmental Decision–Making VALUING ECOSYSTEM SERVICES TOWARD BETTER ENVIRONMENTAL DECISION–MAKING Committee on Assessing and Valuing the Services of Aquatic and Related Terrestrial Ecosystems Water Science and Technology Board Division on Earth and Life Studies NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES THE NATIONAL ACADEMIES PRESS Washington, D.C. www.nap.edu

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Valuing Ecosystem Services: Toward Better Environmental Decision–Making THE NATIONAL ACADEMIES PRESS 500 Fifth Street, N.W. Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. Support for this project was provided by the U.S. Environmental Protection Agency under Award No. X-82872401; U.S. Army Corps of Engineers Award No. DACW72-01-P-0076; U.S. Department of Agriculture, Cooperative State Research, Education, and Extension Service under Award No. 2001-38832-11510; U.S. Department of Agriculture-Research, Education, and Economics, Agricultural Research Service, Administrative and Financial Management, Extramural Agreements Division under Award No. 59-0790-1-136. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number 0-309-09318-X (Book) International Standard Book Number 0-309-54586-2 (PDF) Library of Congress Control Number 2005924663 Additional copies of this report are available from the National Academies Press, 500 Fifth Street, N.W., Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu. Cover design by Van Nguyen, National Academies Press. Cover photograph by Lauren Alexander, Staff Officer with the Water Science and Technology Board, National Research Council. Copyright 2000 by Lauren Alexander Augustine. Copyright 2005 by the National Academy of Sciences. All rights reserved. Printed in the United States of America.

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Valuing Ecosystem Services: Toward Better Environmental Decision–Making THE NATIONAL ACADEMIES Advisers to the Nation on Science, Engineering, and Medicine The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce M. Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievement of engineers. Dr. Wm. A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce M. Alberts and Dr. Wm. A. Wulf are chair and vice-chair, respectively, of the National Research Council. www.national-academies.org

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Valuing Ecosystem Services: Toward Better Environmental Decision–Making COMMITTEE ON ASSESSING AND VALUING THE SERVICES OF AQUATIC AND RELATED TERRESTRIAL ECOSYSTEMS GEOFFREY M. HEAL, Chair, Columbia University, New York EDWARD B. BARBIER, University of Wyoming, Laramie KEVIN J. BOYLE, University of Maine, Orono ALAN P. COVICH, University of Georgia, Athens STEVEN P. GLOSS, Southwest Biological Science Center, U.S. Geological Survey, Tucson, AZ CARLTON H. HERSHNER, Virginia Institute of Marine Science, Gloucester Point JOHN P. HOEHN, Michigan State University, East Lansing CATHERINE M. PRINGLE, University of Georgia, Athens STEPHEN POLASKY, University of Minnesota, St. Paul KATHLEEN SEGERSON, University of Connecticut, Storrs KRISTIN SHRADER-FRECHETTE, University of Notre Dame, Notre Dame, Indiana National Research Council Staff MARK C. GIBSON, Study Director ELLEN A. DE GUZMAN, Research Associate

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Valuing Ecosystem Services: Toward Better Environmental Decision–Making WATER SCIENCE AND TECHNOLOGY BOARD R. RHODES TRUSSELL, Chair, Trussell Technologies, Inc., Pasadena, California MARY JO BAEDECKER, U.S. Geological Survey (Retired), Vienna, Virginia GREGORY B. BAECHER, University of Maryland, College Park JOAN G. EHRENFELD, Rutgers University, New Brunswick, New Jersey DARA ENTEKHABI, Massachusetts Institute of Technology, Cambridge, Massachusetts GERALD E. GALLOWAY, Titan Corporation, Reston, Virginia PETER GLEICK, Pacific Institute for Studies in Development, Environment, and Security, Oakland, California CHARLES N. HAAS, Drexel University, Philadelphia, Pennsylvania KAI N. LEE, Williams College, Williamstown, Massachusetts CHRISTINE L. MOE, Emory University, Atlanta, Georgia ROBERT PERCIASEPE, National Audubon Society, New York, New York JERALD L. SCHNOOR, University of Iowa, Iowa City LEONARD SHABMAN, Resources for the Future, Washington, DC KARL K. TUREKIAN, Yale University, New Haven, Connecticut HAME M. WATT, Independent Consultant, Washington, DC CLAIRE WELTY, University of Maryland, Baltimore County JAMES L. WESCOAT, JR., University of Illinois at Urbana-Champaign Staff STEPHEN D. PARKER, Director LAURA J. EHLERS, Senior Staff Officer MARK C. GIBSON, Senior Staff Officer JEFFREY W. JACOBS, Senior Staff Officer WILLIAM S. LOGAN, Senior Staff Officer LAUREN E. ALEXANDER, Staff Officer STEPHANIE E. JOHNSON, Staff Officer M. JEANNE AQUILINO, Financial and Administrative Associate ELLEN A. DE GUZMAN, Research Associate PATRICIA JONES KERSHAW, Study/Research Associate ANITA A. HALL, Administrative Assistant DOROTHY K. WEIR, Senior Project Assistant

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Valuing Ecosystem Services: Toward Better Environmental Decision–Making Preface The development of the ecosystem services paradigm has enhanced our understanding of how the natural environment matters to human societies. We now think of the natural environment, and the ecosystems of which it consists, as natural capital—a form of capital asset that, along with physical, human, social, and intellectual capital, is one of society’s important assets. As President Theodore Roosevelt presciently said in 1907, The nation behaves well if it treats the natural resources as assets which it must turn over to the next generation increased and not impaired in value.1 Economists normally value assets by the value of services that they provide: Can we apply this approach to ecological assets by valuing the services provided by ecosystems? An ecosystem is generally accepted to be an interacting system of biota and its associated physical environment. Aquatic and related terrestrial ecosystems are among the most important ecosystems in the United States, and Congress through the Clean Water Act has recognized the importance of the services they provide and has shown a concern that these services be restored and maintained. Such systems intuitively include streams, rivers, ponds, lakes, estuaries, and oceans. However, most ecologists and environmental regulators include vegetated wetlands as aquatic ecosystems, and many also think of underlying groundwater aquifers as potential members of the set. Thus, the inclusion of “related terrestrial ecosystems” for consideration in this study is a reflection of the state of the science that recognizes the multitude of processes linking terrestrial and aquatic systems. Many of the policies implemented by various federal, state, and local regulatory agencies can profoundly affect the nation’s aquatic and related terrestrial ecosystems, and in consequence, these bodies have an interest in better understanding the nature of their services, how their own actions may affect them, and what value society places on their services. The need for this study was recognized in 1997 at a strategic planning session of Water Science and Technology Board (WSTB) of the National Research Council (NRC). The Committee on Assessing and Valuing the Services of Aquatic and Related Terrestrial Ecosystems was established by the NRC in early 2002 with support from the U.S. Environmental Protection Agency (EPA), U.S. Army Corps of Engineers 1   Inscribed on the wall of the entrance hall of the American Museum of Natural History, Washington, D.C.

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Valuing Ecosystem Services: Toward Better Environmental Decision–Making (USACE), and U.S. Department of Agriculture (USDA). Its members are drawn from the ranks of economists, ecologists, and philosophers who have professional expertise relating to aquatic ecosystems and the valuation of ecosystem services. In drafting this report the committee members have sought to understand and integrate the disciplines, primarily ecology and economics, that cover the field of ecosystem service valuation. In fact, the committee quickly discovered that this is not an established field—ecologists have only recently begun to think in terms of ecosystem services and their determinants, while economists have likewise only very recently begun to incorporate the factors affecting ecosystem services into their valuations of these services. If we as a society are to understand properly the value of our natural capital, which is a prerequisite for sensible conservation decisions, then this growing field must be developed further and this report provides detailed recommendations for facilitating that development. Although the field is relatively new, a great deal is understood, and consequently the committee makes many positive conclusions and recommendations concerning the methods that can be applied in valuing the services of aquatic and related terrestrial ecosystems. Furthermore, because the principles and practices of valuing ecosystem services are rarely sensitive to whether the underlying ecosystem is aquatic or terrestrial, the report’s various conclusions and recommendations are likely to be directly, or at least indirectly applicable to valuation of the goods and services provided by any ecosystem. The study benefited greatly from the knowledge and expertise of those who made presentations at our meetings, including Richard Carson, University of California, San Diego; Harry Kitch, USACE; John McShane, EPA; Angela Nugent, EPA; Michael O’Neill, USDA; Mahesh Podar, EPA (retired); John Powers, EPA; Stephen Schneider, Stanford University; and Eugene Stakhiv, USACE Institute for Water Resources. The success of the report also depended on the support of the NRC staff working with the committee, and it is a particular pleasure to acknowledge the immense assistance of study director Mark Gibson and WSTB research associate Ellen de Guzman. Finally, of course, the committee members worked extraordinarily hard and with great dedication, expertise, and good humor in pulling together what was initially a rather disparate set of issues and methods into the coherent whole that follows. This report was reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise in accordance with the procedures approved by the NRC’s Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We wish to thank the following individuals for their review of this report: Mark Brinson, East Carolina University, Greenville, North Carolina; J. Baird Callicott, University of North Texas, Denton; Nancy Grimm, Arizona State University, Tempe;

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Valuing Ecosystem Services: Toward Better Environmental Decision–Making Michael Hanemann, University of California, Berkeley; Peter Kareiva, The Nature Conservancy, Seattle, Washington; Raymond Knopp, Resources for the Future, Washington, D.C.; Sandra Postel, Global Water Policy Project, Amherst, Massachusetts; and Robert Stavins, Harvard University, Cambridge. Although the reviewers listed above have provided many constructive comments and suggestions, they were not asked to endorse the conclusions or recommendations, nor did they see the final draft of the report before its release. The review of this report was overseen by John Boland, Johns Hopkins University, Baltimore. Appointed by the National Research Council, he was responsible for making certain that an independent examination of the report was carefully carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring committee and the NRC. Geoffrey M. Heal, Chair

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Valuing Ecosystem Services: Toward Better Environmental Decision–Making Contents     EXECUTIVE SUMMARY   1 1   INTRODUCTION   17      Statement of the Problem   22      Study Origin and Scope   26      Perspective of the Report   27      Summary and Conclusions   29      References   30 2   THE MEANING OF VALUE AND USE OF ECONOMIC VALUATION IN THE ENVIRONMENTAL POLICY DECISION-MAKING PROCESS   33      Introduction   33      Role of Economic Valuation   35      The Economic Approach to Valuation   44      Summary: Conclusions and Recommendations   54      References   56 3   AQUATIC AND RELATED TERRESTRIAL ECOSYSTEMS   59      Introduction   59      Extent and Status of Aquatic and Related Terrestrial Ecosystems in the United States   62      Cataloging Ecosystem Structure and Function and Mapping Ecosystem Goods and Services   75      Issues Affecting Identification of Goods and Services   83      Summary: Conclusions and Recommendations   88      References   90 4   METHODS OF NONMARKET VALUATION   95      Introduction   95      Economic Approach to Valuation   95      Classification of Valuation Approaches   100      Applicability of Methods to Valuing Ecosystem Services   129      Issues   137      Summary: Conclusions and Recommendations   141      References   143 5   TRANSLATING ECOSYSTEM FUNCTIONS TO THE VALUE OF ECOSYSTEM SERVICES: CASE STUDIES   153

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Valuing Ecosystem Services: Toward Better Environmental Decision–Making      Introduction   153      Mapping Ecosystem Functions to the Value of Ecosystem Services: Case Studies   155      Implications and Lessons Learned   190      Summary: Conclusions and Recommendations   196      References   197 6   JUDGMENT, UNCERTAINTY, AND VALUATION   209      Introduction   209      Professional Judgments   209      Uncertainty   216      Decision-Making and Decision Criteria Under Uncertainty   221      Illustrations of the Treatment of Uncertainty   227      Summary: Conclusions and Recommendations   232      References   236 7   ECOSYSTEM VALUATION: SYNTHESIS AND FUTURE DIRECTIONS   239      General Premises   240      Synthesis of Major Conclusions   242      Guidelines/Checklist for Valuation of Ecosystem Services   253      Overarching Recommendations   256     APPENDIXES     A   Summary of Related NRC Reports   261 B   Household Production Function Models   266 C   Production Function Models   270 D   Committee and Staff Biographical Information   274