A Tempest over Valuing the World's Ecosystem Services

In May 1997, Robert Costanza and a long list of coauthors published a paper titled "The Value of the World's Ecosystem Services and Natural Capital" in Nature. They estimate the annual value of the world's ecosystem services to be about $36 trillion, compared with an estimate of about $18 trillion for the world's annual gross product. The reaction of neoclassical economists is best typified by V. Kerry Smith's response (Mispriced Planet, Summer 1997, Regulation): "Their results should not be used in any form—whether as measures of the importance of changes in natural resources to human welfare; as yardsticks for future project appraisals; or as sources of a road map for future research." Although there are many technical issues for debate, the core of the argument arises because of the claim by Costanza and others (1997) that their estimate of the value of ecosystem services is based on the concept of WTP.

A thought experiment is useful. Imagine that evil aliens orbit Earth and threaten to destroy ecosystem resources one by one unless we pay blackmail in the form of an annual fee for each service. Costanza and his colleagues are quickly assembled to value each category of ecosystem services. The first resource threatened is forests, which generate $4.7 trillion per year, on the basis of the estimated WTP of the world's countries for the forests' total ecosystem services (Costanza and others 1997). On the basis of the group's recommendations, Earth agrees to pay $4.7 trillion each year. Next the aliens threaten the coastal shelves, worth $4.3 trillion. However, having already agreed to pay $4.7 trillion for forests, reducing available world gross product for human consumption from $18 to $13.3 trillion, Earth opposes the Costanza estimates because "we cannot afford $4.3 trillion more; we are much poorer now." In other words, the demand and value for coastal shelves is reduced because available gross product from which to pay is reduced. If we follow this line of argument, the world's total annual gross product ($18 trillion) is the most that could be paid as a bribe to save the world's ecosystem services without reducing the accumulated value of the the world's capital.

The value estimates of Costanza and others (1997) are based on separate studies of the values of individual components, each of which assumes that people's incomes remain at current levels. The problem has been termed the independent valuation and summation problem by Hoehn and Randall (1989), who argue that it is inappropriate to simply add the values obtained from independent studies, because aggregate values will be overstated. It is clear from the way that Costanza and others construct their estimates that their work does, in fact, suffer from the independent valuation and summation problem. However, the story is not over.

Costanza and others (1997) respond to Smith with a substantive counter-argument of their own. Because ecosystem services are, for the most part,

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