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Market Valuation Models and Ecosystem Management in Making Legal and Policy Choices

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Objectives/Hypotheses: Despite undeniable progress in environmental protection over the last 25 years ecosystems remain under threat, buffeted by the systematic undervaluation of decision making processes and the insufficient protections of environmental law. This project seeks to address this compound failure by practical application of recent scientific and economic research on the valuation of ecosystem services. "Ecosystem services" refer to the numerous conditions and processes associated with natural ecosystems that confer significant benefit to humanity. Recent research has now made feasible a rigorous and, in some cases, economic characterization of the ways in which human well-being depends upon ecosystem services. These services have been shown to be extraordinarily valuable. The project's working hypotheses are that (1) while extremely valuable, ecosystem services are generally not explicitly valued in agency decision making procedures, (2) use of non-monetary valuation methods -- i.e. indicators -- focused on performance measures of local ecosystem services allows prioritization of agency involvement, and (3) legal authority exists to shift the focus of decision making processes to maintenance of ecosystem services, thereby improving ecosystem management and creating a secondary information market for ecosystem services research.

Approach: This interdisciplinary project brings together leading economists, ecologists, and legal scholars to transform emerging research on ecosystem services into practically useful and significant decision making models. Empirical research will test hypothesis (1), examining wetlands banking projects to confirm whether they explicitly value ecosystem services. These findings will be combined with non-market valuation methodologies, selection of appropriate indicators, and legal analysis to create decision making models addressing ecosystem services in the context of CERCLA site remediation, wetlands banking, and natural resource damages.

Expected Results: The decision making models will be presented in a report presenting the research findings and a practical "Users Guide" for decision makers in the field. A workshop involving regulators as well as academics and the regulated community will critique and validate the report's relevance and practical applicability. The final report will prove a critical resource for government officials to consider, value, and protect ecosystem services in their decisions.

Metadata

EPA/NSF ID:
R826612
Principal Investigators:
Salzman, James
Ehrlich, Paul
Daily, Gretchen
Daly, Herman
King, Dennis
Ruhl, J. B.
Technical Liaison:
Research Organization:
American University
Funding Agency/Program:
EPA/ORD/Valuation
Grant Year:
1998
Project Period:
June 1, 1998 - August 23, 2000
Cost to Funding Agency:
$163,265
Project Status Reports:
For the Year 1999

Objective:

Despite undeniable progress in environmental protection over the last 25 years, ecosystems remain under threat, buffeted by the systematic undervaluation of decisionmaking processes and the insufficient protections of environmental law. This project seeks to address this compound failure by practical application of recent scientific and economic research on the valuation of ecosystem services. "Ecosystem services" refer to the numerous conditions and processes associated with natural ecosystems that confer significant benefit to humanity. Recent research has now made feasible a rigorous and, in some cases, economic characterization of the ways in which human wellbeing depends upon ecosystem services. These services have been shown to be extraordinarily valuable. The project's working hypotheses are that: (1) while extremely valuable, ecosystem services are generally not explicitly valued in agency decisionmaking procedures; (2) use of nonmonetary valuation methods (i.e., indicators) focused on performance measures of local ecosystem services allows prioritization of agency involvement; and (3) legal authority exists to shift the focus of decisionmaking processes to maintenance of ecosystem services, thereby improving ecosystem management and creating a secondary information market for ecosystem services research.

Empirical research will test the first hypothesis by examining wetlands banking projects to confirm whether they explicitly value ecosystem services. These findings will be combined with nonmarket valuation methodologies, selection of appropriate indicators, and legal analysis to create decisionmaking models addressing ecosystem services in the context of Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) site remediation and wetlands banking.

Progress Summary:

The assessment of ecosystem services has been examined in four settings: wetlands mitigation banking, the Exxon Valdez oil spill restoration, National Environmental Protection Act (NEPA) environmental impact statements, and development of U.S. Environmental Protection Agency (EPA) indicators of environmental quality. Ecosystem services generally are not considered explicitly, although their value can be captured in some instances by use of "umbrella indicators." The statutory and regulatory authority for ecosystem service protection also has been examined in the context of wetlands banking and CERCLA site remediation; the relevant legislative history has been examined as well.

We have written a report setting out the COPE model developed by Dr. Dennis King. We are using the COPE model to evaluate wetland mitigation banking trades at Little Pine Island, FL. This requires developing prototype indicators that address both biophysical capacity (production of the service) and landscape context (delivery of the service) for the trades as well as a valuation technique.

We have drafts underway for all the tasks described above. Completion is expected in spring 2000.

Supplemental Keywords: groundwater, watersheds, habitat, cost-benefit, contingent valuation, conservation, public goods.

Project Reports:
Final

Objective: Despite undeniable progress in environmental protection over the last 30 years, ecosystems remain under threat, buffeted by the systematic under-valuation of decision making processes and the insufficient protections of environmental law. This project seeks to address this compound failure by examining the potential for practical application of recent scientific and economic research on the valuation and protection of ecosystem services. "Ecosystem services" refer to the numerous conditions and processes associated with natural ecosystems that confer significant benefit to humanity. Recent research has now made feasible a rigorous and, in some cases, economic characterization of the ways in which human well-being depends upon ecosystem services. These services have been shown to be extraordinarily valuable, yet the policy and legal implications of ecosystem services are still a nascent research field. Our overarching goal has been to develop the conceptual and strategic grounding for future work that integrates ecosystem service protection into environmental policy and law.

The project's working hypotheses are that: (1) while extremely valuable, ecosystem services are generally not explicitly valued in agency decision making procedures; (2) use of non-monetary valuation methods (i.e., indicators?focused on performance measures of local ecosystem services allows prioritization of agency involvement); and (3) legal authority exists to shift the focus of decision making processes to maintenance of ecosystem services, thereby improving ecosystem management and creating a secondary information market for ecosystem services research.

This interdisciplinary project brings together leading economists, ecologists, and legal scholars to transform emerging research on ecosystem services into practically useful and significant decision making models. Empirical research will test the first hypothesis, examining whether wetlands mitigation banking, oil spill clean-ups, and major U.S. Environmental Protection Agency (EPA) indicators explicitly protect or value ecosystem services. These findings will be combined with non-market valuation methodologies, selection of appropriate indicators, and legal analysis to evaluate decision making models addressing ecosystem services in the context of Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) site remediation and wetlands mitigation banking.

Summary/Accomplishments: The research was staged to address three questions: (1) whether agencies have the legal authority to explicitly protect ecosystem services; (2) if so, whether environmental agencies currently consider ecosystem services (explicitly or not) in their activities; and (3) how agencies practically could better identify, value, and protect services. In brief, we found that: (1) legal authority currently on the books would authorize greater protection of services in the context of wetlands mitigation banking, environmental impact assessment, CERCLA site remediation, and oil spill remediation; (2) agencies generally do not explicitly consider protection of ecosystem services in their activities but, in some cases, protect the services indirectly; and (3) a field-tested methodology for wetlands mitigation banking holds great promise to score trades based on their value but that, in the case of restoring groundwater ecosystem services at CERCLA sites, the science is presently inadequate to develop robust indicators.

Do Agencies Currently Have the Legal Authority to Explicitly Protect Services?

Wetlands Mitigation Banking. The Clean Water Act Guidelines for implementing wetlands mitigation banking provide extensive descriptions of wetlands values and functions that the Army Corps of Engineers and EPA should consider. Under the Mitigation Guidance, for example, the Corps "will strive to achieve a goal of no overall net loss of values and functions." The Guidelines, Mitigation Guidance, and the Banking Guidance all provide clear regulatory authority explicitly to consider ecosystem service values such as those derived from the water purification and recreational functions wetlands provide. Although the existing legal framework of wetlands banking clearly accommodates integration of ecosystem service values, however, nothing in the regulations requires or encourages that approach. Indeed, although functional value is supposed to be considered in mitigation banking, the regulations also allow use of relatively crude surrogates for functional values, such as acres and rough functional assessment scores.

CERCLA Site Remediation. CERCLA provides that Natural Resource Damages (NRD) may be assessed as compensation for injuries to natural resources on property owned by the federal, state, or local governments (and, in some cases, Indian tribes). Potentially responsible parties are liable for injury to services, including the costs for rehabilitation and restoration to baseline conditions. The implementing regulations also explicitly authorize compensation for damages to "services," broadly defined to include "the physical and biological functions performed by the resource including the human uses of those functions. These services are the result of the physical, chemical, or biological quality of the resource." Costs for replacement or acquisition of equivalent resources include "the substitution for an injured resource with a resource that provides the same or substantially similar services [as before], when such substitutions are in addition to any substitutions made or anticipated as part of response actions."

Oil Spill Remediation. Many of the NRD regulations described above also are relevant to oil spill remediation. In the Exxon Valdez oil spill clean-up, the Memorandum of Agreement required that restoration funds must be used "for the purposes of restoring, replacing, enhancing or acquiring the equivalent of natural resources injured as a result of the Oil Spill and the reduced or lost services provided by such resources." The document's definition of the terms "restore" and "restoration" expressly included services.

Environmental Impact Assessments. The Council on Environmental Quality (CEQ) implementing regulations for the National Environmental Protection Act (NEPA) provide authority for explicit valuation and consideration of ecosystem services when agencies prepare environmental impact statements in a number of places?most clearly in the regulations for agency assessment involving incomplete or unavailable information, and for analysis of cumulative impacts. NEPA's regulatory authority for consideration of services, however, is weaker than that for CERCLA, oil spills, or wetlands mitigation banking.

Do Agencies Consider Ecosystem Services (Explicitly or Not) in Their Activities?

Indicator Development. As a background study, we reviewed the extent to which basic indicators used by the EPA currently capture ecosystem services or are capable of doing so. Most of the environmental indicators used by EPA are being used to assess environmental conditions and stressors in ecosystems. While they do not focus directly on ecosystem services, many of them already do so indirectly by measuring both "ecosystem goods" (that implicitly depend on functioning services) and ecosystem health (since there is a high correlation between an ecosystem's health and its ability to provide services). This finding raises the important issue of "umbrella indicators" in assessing ecosystem services (discussed below in the Exxon Valdez study).

Wetlands Mitigation Banking. In conducting a literature review and survey of operating wetland mitigation banks, we found that ecosystem services are only rarely valued in trade. Although functional value is supposed to be considered in mitigation banking, the regulations allow use of relatively crude surrogates for functional values, such as acres and rough functional assessment scores. These simple indicia of wetland value are the predominant "currency" for wetland mitigation banking in practice. While these techniques are less costly and time consuming, they generally are not sufficiently accurate to assess whether trades provide net gain (or even balance) of services.

CERCLA Site Remediation. It is an oversimplification, though not a gross one, to describe most Superfund site remediation efforts as exercises in completing a "checklist." Clean-ups are largely driven by the "how clean is clean?" issue, determined by the relevant remediation standards. Once the applicable clean-up requirements have been established, the site is remediated (usually through pump-and-treat technology) until the contaminants in the water samples are below the maximum allowable concentrations. At that point in time, the water meets the remediation standards, but it is not known whether the site's ecosystem services have been restored by the remediation efforts and, under current practice, no one seems to know. In fact, we found that application of standard pump-and-treat technologies significantly reduces the ability of the site to break down remaining and future contaminants.

Oil Spill Remediation. The Exxon Valdez oil spill restoration was chosen as a study case for the simple reason that if the country's most expensive restoration effort did not consider ecosystem services, it stands to reason that the vast majority of other restorations won't, either. The results, though, are less cut and dry. There is no doubt that the restoration efforts did not focus on restoration of services in its planning. Instead, recovery of indicator species populations were set as restoration goals. This raises a more fundamental question?when to focus on indicators of services and when to rely on indirect measures. For example, one would not expect populations of clams to recover to pre-spill levels unless the benthic community and the services it provides had been restored, as well. In this regard, indicator species serve as "umbrella indicators." In some settings, then, it may be acceptable (or even preferable) not to focus on protection or restoration of services if an easier "umbrella" indicator can act as an inexpensive surrogate.

How Can Agencies Practically Identify, Value, and Protect Services?

Wetlands Mitigation Banking. We developed and field-tested a wetland value indicator system (WVI) that can be used to compare wetland values for many different purposes including the prioritization of wetland conservation and restoration efforts, watershed planning and land use zoning, as well as guiding wetland mitigation trades. This goes farther than any work to date in practically applying non-monetary valuation ecosystem services. WVI strikes a middle ground between conventional wetland assessment methods, which ignore wetland values altogether, and modern wetland valuation, which attempts to assign monetary (dollar-based) values to wetlands. The WVI indicators reflect a site's capacity to provide the service, level of service that is provided, service scarcity, and service risks. The indicators are based on data that are generally available from government agencies and suitable for geographic information system (GIS) analysis. The methodology was applied to trades at a wetlands bank in Florida. In discussing the challenges of this pilot study and a retrospective "User's Guide," we hope to provide the foundation for future valuation of ecosystem services and development of a standardized method of analysis.

CERCLA Site Remediation. The easiest way to protect groundwater services is to limit the use of pump-and-treat remediation technologies. A more sophisticated approach to service restoration will require the EPA official supervising the clean-up to: (1) determine that contamination has injured the ability of the site to purify groundwater and, therefore, (2) require the potentially responsible party (3) to restore this ecosystem service. The party also must be able to know when to stop. Objectively determining when the ecosystem service has been sufficiently restored requires accurate indicators of service function. These are a precondition for legal requirements of service restoration. Our original intention was to develop a practical "Users Guide" for decision makers in the field. We have found, though, that the current scientific knowledge does not yet allow us to specify the precise identity and concentrations of generally applicable chemical indicators. This is an area that requires significant further scientific research.
Journal Articles:
Boyd J, et al. Compensation for lost ecosystem services: the need for benefit-based transfer ratios and restoration criteria. Stanford Environmental Law 2001.
Salzman J, Ruhl JB. Currencies and the commodification of environmental law. Stanford Law Review 2001.
Herman J, et al. Groundwater ecosystem services. Stanford Environmental Law 2001.
Ruhl JB, Gregg J. Integrating ecosystem services into environmental law: a case study of wetlands mitigation banking. Stanford Environmental Law 2001.
Salzman J, et al. Protecting ecosystem services: science, economics, and policy. Stanford Environmental Law 2001.
Heal G, et al. Protecting natural capital: ecosystem service districts. Stanford Environmental Law 2001.
Wainger L, et al. Wetland value indicators for scoring mitigation trades. Stanford Environmental Law 2001.

Meeting:
A workshop with regulators, scientists, lawyers, policymakers and the business community met at Stanford in November 2000, to assess the grant's major findings and assess the potential for various strategies to protect the ecosystem services of water purification and flood control.

Presentations:
Florida State University, School of Law, April 2000
Stanford University, Institute of International Studies, February 2000
University of California, Berkeley, Boalt School of Law, November 2000
University of Hawaii, East-West Center, Workshop on Ecosystem Valuation, January 2001
University of Houston, Conference on Environmental Mitigation, April 2000
University of Indiana, Law School Faculty Workshop, March 2000.

Supplemental Keywords: groundwater, watersheds, water, marine, estuary, ecological effects, habitat, cost-benefit, contingent valuation, conservation, public goods.


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