Appendix A
Valuing River Ecosystem Services

The human dimension is increasingly recognized as a critical component of river science, especially in the realm of river restoration or conservation, where social choices must be made in the process of river management (Poff et al., 2003). Thus, the social sciences of economics, policy planning, and management are as relevant to river science as the natural sciences. Of particular importance is the notion—implicit in the discussion in Chapter 2— that society places a finite value on rivers, and the justification for allocating national resources to river science is clearly based on the flow of ecosystem services that rivers provide. However, placing an economic value on the flows of services so that allocations of public funds can be assessed by the usual benefit-cost metric is easier said than done. Here we present a brief summary of the problems that may arise when trying to value water-based ecosystems. For a more thorough treatment, refer to Young (2005), Determining the Economic Value of Water: Concepts and Methods.

Ecosystem services span a gradient from values based solely on the use of a system to pure nonuse values that are based on the existence of an ecosystem. The National Research Council report on ecosystem valuation (NRC, 2005b) classifies ecosystem services as direct, indirect, and existence values. Direct valued uses include water supply, transportation, recreation, and fishing. Indirect valued uses include flood protection, nutrient recycling, genetic material, and wetlands. Existence services are river services that provide the needed habitat to allow current biological ecosystems and their species to thrive.

The direct, indirect, and existence values apply regardless of whether the service is consumptive. For example, water supply and commercial fishing are consumptive services. In contrast, most transportation and recreation services



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River Science at the U.S. Geological Survey Appendix A Valuing River Ecosystem Services The human dimension is increasingly recognized as a critical component of river science, especially in the realm of river restoration or conservation, where social choices must be made in the process of river management (Poff et al., 2003). Thus, the social sciences of economics, policy planning, and management are as relevant to river science as the natural sciences. Of particular importance is the notion—implicit in the discussion in Chapter 2— that society places a finite value on rivers, and the justification for allocating national resources to river science is clearly based on the flow of ecosystem services that rivers provide. However, placing an economic value on the flows of services so that allocations of public funds can be assessed by the usual benefit-cost metric is easier said than done. Here we present a brief summary of the problems that may arise when trying to value water-based ecosystems. For a more thorough treatment, refer to Young (2005), Determining the Economic Value of Water: Concepts and Methods. Ecosystem services span a gradient from values based solely on the use of a system to pure nonuse values that are based on the existence of an ecosystem. The National Research Council report on ecosystem valuation (NRC, 2005b) classifies ecosystem services as direct, indirect, and existence values. Direct valued uses include water supply, transportation, recreation, and fishing. Indirect valued uses include flood protection, nutrient recycling, genetic material, and wetlands. Existence services are river services that provide the needed habitat to allow current biological ecosystems and their species to thrive. The direct, indirect, and existence values apply regardless of whether the service is consumptive. For example, water supply and commercial fishing are consumptive services. In contrast, most transportation and recreation services

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River Science at the U.S. Geological Survey are nonconsumptive. This distinction does not influence the valuation, but helps define the effect of incremental changes in the river ecology. DIRECT VALUATION Where water resources generate market-priced goods, a measure of their value is represented by their price, and the social surplus attributed to the water resource can be measured by the usual consumer’s surplus measures. Examples are ecosystem services such as water purification or commercial fish production. Assigning values to ecosystems and the nature of their supply by river environments lead to economic valuation problems. Most of the challenges on the supply side arise from the difficulty in assigning a particular service to a given set of river characteristics. In most systems that produce economic goods a direct causal relationship, termed a production function, can be assigned between inputs and outputs. This enables a change in a valuable service to be assigned to a change in a particular input. The low flow stage of the river in summer months is an example; however, changes in low summer flows influence many ecosystem services and the effect of increasing summer flows may depend simultaneously on the level of other factors. The integrated nature of river systems means that ecosystem production functions are not only hard to estimate, but may be an inappropriate concept for river ecosystems. Ecosystem services that are directly related to the economy can usually be assigned an economic value based on market prices and a willingness to pay. An alternative basis of value is the willingness of a consumer to accept compensation. These two forms of valuation may differ widely, because with the latter basis of value, a person’s income is not a constraint. A more familiar example to most people would be medical malpractice, where the willingness to pay and accept differ widely. INDIRECT VALUATION Nonmarket services have to be valued indirectly. There are three main approaches. The first includes stated preference methods such as contingent valuation (CV). The second relies on revealed preference methods that include hedonic methods using related goods, travel cost methods, and the cost of averting behavior. The third opportunity cost methods group measures a lower bound on social values by calculating the social cost of providing water related, nonmarket goods. Despite the attention to sophisticated survey methods, CV is dogged by the problem of strategic answers from respondents who realize that, in the survey, they do not have to make trade-offs against a fixed income that are inherent in economic valuation. Despite these problems, contingent valuation provides ac-

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River Science at the U.S. Geological Survey curate relative, if not absolute, values, and for many ecosystem services it is the only operational method. Hedonic values are inferred by measuring the market values of associated goods or services. The values are expressed in terms of the cost of alternative market-based uses that are foregone in order to provide the nonmarket service. This relies on measuring indirect indicators of economic value by finding linked goods that are market priced. Travel time and expenditures on recreation are often used as hedonic measures. Another common method is to reveal the implicit value of the service by using the difference in house or land values with and without the ecosystem services. Opportunity cost methods requires a strong basis in river science to link nonmarket and market goods through a river system. A good example is the valuation of reduced eutrophication levels in the Mississippi River. While the consequences are so widespread that they cannot be addressed by a single survey, the source of eutrophication can largely be traced to excessive fertilizer use in upstream catchments. However, measuring the incremental change in eutrophication from a given fertilizer change requires a clear scientific linkage, not only in terms of causation but also in the time and area of the river system. A study of the level of eutrophication in the Mississippi River found the level of fertilizer used by farmers in Midwestern river states was, along with the slope and erodability of the farmland, responsible for a large proportion of the initial eutrophic load in the river. The cost of reducing this initial load was calculated using the opportunity cost of reducing farm fertilizer use and the consequent loss in crop yield. This is a good example of the opportunity cost valuation method being used in conjunction with river science to arrive at the effective cost of reducing a given pollution level. As an example of indirect valuation, river ecosystems have a significant role in reducing the risk of flooding and other water-based risks such as hurricane surges. While some risks can be measured directly in terms of market insurance rates, most flood risks have to be measured by combining the event frequency with the expected damage. Clearly, river science underlies both these calculations. The extent of flood damage for a given event has to be calculated by careful consideration of the stages that will result from different flood events, and the duration of the inundation. The cost of flood damage is often influenced by the duration. The frequency of flood events can only be assessed by a full watershed approach, which is the essence of river science. EXISTENCE VALUATION Many ecological products have value to many consumers without their use or consumption. Existence services may be rooted in cultural heritage values and concern for future generations, but many feel there is intrinsic value in knowing that there are wild and unique ecosystems, even though one may never experi-

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River Science at the U.S. Geological Survey ence them. For example, in the debate over whether to allow drilling for hydrocarbons in the Arctic National Wildlife Refuge, a miniscule percentage of those opposed to drilling have, or will ever, actually visit the refuge. The Endangered Species Act is one indicator of how the nation has put an existence value on native species. The term “option value” (i.e., value that people place on having the option to enjoy something in the future), is commonly invoked where there is significant uncertainty about the sustainability of ecosystem functions and the possibility that some ecosystem characteristics are irreversible, once lost. The Precautionary Principle proposes an option conservative approach whenever outcomes are uncertain. One option example is ecosystem biodiversity, especially where one suspects that the ecosystem does not have the continuous degradation and recovery curve that is implicit in most economic calculations. If the ecosystem has the probability of a threshold hysteresis effect and irreversibility, option values would require its preservation. There is also a viewpoint that argues that ecosystems have intrinsic non-anthropogenic values. However one may feel about this argument conceptually, the value of rivers to humans, measured by a money metric, seems essential if river ecosystem services are to effectively compete for public expenditures. VALUATION OVER TIME In addition to their current existence, many ecosystem goods have intergenerational equity concerns. Intergenerational values are based on the principle that future generations should have the same access to these goods as the current generation. This value function is the root cause of the interest in sustainability in general and sustainable river ecosystems in particular. However, determining how to change economic values over time is non-trivial. River ecosystem services are largely flows of services that for a stable river system, change stochastically around a central tendency. The standard economic approach to such long-term valuation problems is to use a discount rate to express a time series of effects as an equivalent present value. Clearly, the level of the discount rate affects the importance of services that occur far in the future. There is a long established literature on social rates of discount. Where the basis of comparison is strictly financial, economists feel confident using the opportunity cost of invested funds as the discount rate. However, for most river ecosystem services, a financial opportunity cost is inappropriate and forces an emphasis on services that occur in the near future. Several authors (e.g., Heal, 2001) draw the distinction between discounting future utilities and the standard financial discounting. Alternatives to financial discounting include hyperbolic discounting where the discount rate is systematically reduced over time. This method suffers from time inconsistency in which it can be shown that optimizing individuals in the future will not make the trade-

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River Science at the U.S. Geological Survey offs predicted by the model. An alternative approach is to define a recursive utility function. In this specification, service users are reluctant to change their expected consumption of the service over time. Recursive utility is time consistent and can be combined with a subjective rate of discount and risk aversion. However, it is not often used because of the mathematical complexity of the function. Getting consistent contingent valuation responses is complicated when one asks consumers to estimate future values for different generations. An indirect method of valuation can be performed by defining the current economic restrictions and reallocations that are needed to ensure future viability. By measuring the opportunity cost of these constraints on the economic system, we can measure a lower bound value that is currently politically acceptable. In summary, the economic valuation of the wide range of ecosystem services provided by rivers presents many problems because of both the lack of market signals for many of the services and the difficulty in assigning direct causal effects to inputs into complex and interdependent ecosystems. However, there is a wide range of approaches that can provide reasonable valuations for many services and at least a consistent ordering of relative values for those services that are more difficult to value.

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