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Ecological economics.

IS A SWAMP worth more than a shopping mall? Perhaps not, at first blush. But what if we discover that the swamp is cleaning sewage and trapping atmospheric carbon? Does its "value" increase? If so, by how much? How many such valuable services does it take for the swamp to be worth more than the shopping mall?

Answers to questions like these may be hard to come by, but we've been making things more difficult than we have to. By viewing ecological problems as a battle between economic interests and environmental interests, we force groups to take sides to their own (and society's) mutual detriment. But what if environmental interests could be incorporated into economic planning? What if environmental assets were routinely considered in our economic accounting system? Could economic forces then be used to preserve the environment?

If we are ever to find workable long-term solutions to our environmental problems, we need a completely new conception of the relationship between economics and ecology, one that regards the economic subsystem as a part of the larger ecological life-support system. (1) Such a conception must go beyond the narrow boundaries of the traditional academic disciplines to extend and integrate the study and management of "nature's household" (ecology) and "humankind's household" (economics). It must acknowledge that in the long run a healthy economy can only exist in symbiosis with a healthy ecology.

Ecological economics is beginning to be put into practice by a recently formed worldwide, multidisciplinary group called the International Society for Ecological Economics. They are in the forefront of a growing realization: that the most obvious danger of excluding nature from economics is that nature is the economy's life-support system, and that by ignoring it we may inadvertently damage it beyond repair. Current economic systems do not have built-in methods for incorporating concern about the sustainability of our ecological life support system, nor do they adequately account for the value of ecological systems in contributing to our well-being.


One of the more important manifestations of this problem is that it creates major misperceptions about how well the economy is doing. Gross National Product (GNP) as well as other related measures of national economic performance have come to be extremely important as policy objectives, political issues and benchmarks of the general welfare. Yet GNP as presently defined ignores the contribution of nature to production, often leading to peculiar results.

For example, a standing forest provides real economic services for people: by conserving soil, cleaning air and water, providing habitat for wildlife, and supporting recreational activities. But as GNP is currently figured, only the value of harvested timber is calculated in the total. On the other hand, the billions of dollars that Exxon spent on the Valdez cleanup -- and the billions spent by Exxon and others on the more than 100 other oil spills in the past sixteen months -- all actually improved our apparent economic performance. Why? Because cleaning up oil spills creates jobs and consumes resources, all of which add to GNP. Of course, these expenses would not have been necessary if the oil had not been spilled, so they shouldn't be considered "benefits." But GNP adds up all production without differentiating between costs and benefits and is therefore not a very good measure of economic health.

In fact, when resource depletion and degradation are factored into economic trends, what emerges is a radically different picture from that depicted by conventional methods. Herman Daly and John Cobb (2) have attempted to adjust GNP to account mainly for depletions of natural capital, pollution effects, and income distribution effects by producing an "index of sustainable economic welfare" (ISEW). Their index, described in detail in the appendix of their book, starts with personal consumption expenditures (weighted for distributional inequality) and net capital growth as the basis of welfare. These are then adjusted with five positive terms for things ranging from unpaid household services to public expenditures on streets and highways, and twelve negative terms for things ranging from defensive expenditures on health and education, costs of commuting, congestion, and auto accidents, costs of air, water, and noise pollution, loss of natural capital like wetlands and topsoil, and depletion of nonrenewable resources. A second version of the index (ISEW2) also includes a negative term for long-term environmental damage. Figure 1 shows both versions of their index compared to GNP for the period from 1950-86. What is strikingly clear is that, while GNP rose over this interval, ISEW remained relatively unchanged since about 1970. When factors such as loss of farms and wetlands, costs of mitigating acid rain effects, and health costs caused by increased pollution, are accounted for, the economy has not improved at all. If we continue to ignore natural ecosystems, we may drive the economy down while we think we are building it up. By consuming our natural capital, we endanger our ability to sustain income.


"Sustainability" does not necessarily mean a stagnant economy, but we must be careful to distinguish between "growth" and "development." Economic growth, which is an increase in quantity, cannot be sustainable indefinitely on a finite planet. Economic development, which is an improvement in the quality of life without necessarily causing an increase in quantity of resources consumed, may be sustainable. Sustainable growth is an impossibility. Sustainable development must become our primary long-term policy goal.

Sustainability has been variously construed, but a useful definition is the amount of consumption that can be sustained indefinitely without degrading capital stocks -- including "natural capital" stocks. In a business, capital stock includes long-term assets such as buildings and machinery that serve as the means of production. Natural capital is the soil and atmospheric structure, plant and animal biomass, etc. that, taken together, form the basis of all ecosystems. This natural capital stock uses primary inputs (sunlight) to produce the range of ecosystem services.

To achieve sustainability, we must incorporate ecosystem goods and services into our economic accounting. The first step is to determine values for them comparable to those of economic goods and services. For example, we know what it costs to build and run sewage treatment plants. Because natural ecosystems perform these same services for free, they are worth at least the amount we would pay for corresponding human-produced services.

In determining values we must also consider how much of our ecological life support systems we can afford to lose. To what extent can we substitute manufactured for natural capital, and how much of our natural capital is irreplaceable? For example, could we replace the radiation screening services of the ozone layer if it were destroyed?

Some argue that we cannot place economic value on such "intangibles" as human life, environmental aesthetics, or long-term ecological benefits. But, in fact, we do so every day. When we set construction standards for highways, bridges and the like, we value human life -- acknowledged or not -- because spending more money on construction would save lives. To preserve our natural capital, we must confront these often difficult choices and valuations directly rather than denying their existence.

Because of the inherent difficulties and uncertainties in determining values, ecological economics acknowledges several different independent approaches. The conventional economic view defines value as the expression of human preferences, with the preferences taken as given and with no attempt to analyze their origins or patterns of long-term change. For goods and services with few long-term impacts (like tomatoes or bread) that are traded in well-functioning markets with adequate information, market ("revealed preference") valuations work well.

But ecological goods and services (like wetland sewage treatment or global climate control) are long-term by nature, are generally not traded in markets (no one owns the air or water), and information about their contribution to individual's well-being is poor. To determine their value, economists try to get people to reveal what they would be willing to pay for ecological goods and services in hypothetical markets. For example, we can ask people the maximum they would pay to use national parks, even if they don't have to actually pay it. The quality of results in this method depends on how well informed people are, and it does not adequately incorporate long-term goals because it excludes future generations from bidding in the markets.

An alternative method for determining ecological values assumes a biophysical basis for value. This theory suggests that in the long run humans come to value things according to how costly they are to produce, and that this cost is ultimately a function of how organized they are relative to their environment. To organize a complex structure takes energy, both directly in the form of fuel and indirectly in the form of other organized structures like factories. For example, a car is a much more organized structure than a lump of iron ore, and therefore it takes a lot of (direct and indirect) energy to organize iron ore into a car. The amount of solar energy required to grow forests can therefore serve as a measure of their energy cost, their organization, and hence their value.

The point that must be stressed is that the economic value of ecosystems is connected to their physical, chemical, and biological role in the long-term global system, whether the present generation fully recognizes that role or not. If it is accepted that each species, no matter how seemingly uninteresting or lacking in immediate utility, has a role in natural ecosystems (which do provide many direct benefits to humans), it is possible to shift the focus away from our imperfect short-term perceptions and derive more accurate values for long-term ecosystem services. We may be able to estimate the values contributed by, say, maintenance of water and atmospheric quality to long-term human well-being.


How can we calculate the value of ecosystems? One of us (Costanza) and Steve Farber of Louisiana State University recently completed a study of the value of coastal wetlands in Louisiana (Table 1). We used two different valuation techniques: willingness-to-pay (WTP) and energy analysis (EA).

WTP valuation estimates individual's willingness-to-pay for the benefits of wetlands -- in this case, for four major categories: commercial fishing, trapping, recreation, and storm protection. We did not include two other categories of willingness-to-pay: to preserve wetlands because they may one day visit them (option value) or simply to know that wetlands exist (existence value) even though we recognize that they are significant.

Table 1

Summary of Wetland Value Estimates

(1983 dollars)
 Per Acre Present Value
Method at specified discount rate
 8% 3%
WTP based
 Use Values
 Commercial Fishery $317 $846
 Trapping 151 401
 Recreation 46 181
 Storm Protection 1915 7549
 Total $2429 $8977
 Non-Use Values
 Option and Existence Values ? ?
EA based
 GPP conversion 6400-10600 17000-28200
"Best Estimate" $2429-6400 $8977-17000
 Source: Costanza, R. S., C. Farber, and J. Maxwell, "The
and Management of Wetland Ecosystems," Ecological Economics,
1:335-361. (1989).

To estimate recreation values, two techniques were used. The first simply asked recreational users what they would be willing to pay to use the wetlands. The problem with this technique is that respondents may answer "strategically." For example, if they think they may actually have to pay what they say, they may give a value lower than their true value. On the other hand, if they think their response may increase the probability of implementing a project they desire, they may state a value higher than their true value. The second technique (which was the primary means used) estimated WTP from what it actually costs users to travel there, such as plane fare, boat rental, gas and mileage costs, etc.

The EA technique uses the solar energy captured by ecosystems as a measure of their value. To estimate this energy in wetlands, we measured the Gross Primary Production (GPP) or the amount of solar energy captured and stored in plants. GPP is the basis for the food chain that supports the production of economically valuable products such as fish and wildlife. By converting GPP to a value based on what it would cost to produce the same energy with fossil fuels, we can put a dollar value on this energy. This technique does not require a detailed listing of all the specific benefits of wetlands, but it may overestimate their value if some of the wetland products and services are not useful (directly or indirectly) to society.

Depending on the method of valuation and the discount rate assumed, our "best estimate" of the economic value Louisiana coastal wetlands lies between $2,500 and $17,000 for every acre of marsh. The market value, exclusive of mineral rights, is about $500 an acre.


Current systems of regulation are not very efficient at managing environmental resources for sustainability, particularly in the face of uncertainty about long-term values and impacts. They are inherently reactive rather than proactive. They induce legal confrontation, obfuscation, and government intrusion into business. Rather than encouraging long-range technical and social innovation, they tend to suppress it. They do not mesh well with the market signals that firms and individuals use to make decisions and do not effectively translate long-term global goals into short-term local incentives.

We need to explore promising alternatives to our current command and control environmental management systems, and to modify existing government agencies and other institutions accordingly. The enormous uncertainty about local and trans-national environmental impacts needs to be incorporated into decisionmaking. We also need to understand better the sociological, cultural, and political criteria for acceptance or rejection of policy instruments.

One example of an innovative policy instrument currently being studied is a flexible environmental assurance bonding system designed to incorporate environmental criteria and uncertainty into the market system, and to induce positive environmental technological innovation.

In addition to direct charges for known environmental damages, a company would be required to post an assurance bond equal to the current best estimate of the largest potential future environmental damages; the money would be kept in interest-bearing escrow accounts. The bond (plus a portion of the interest) would be returned if the firm could show that the suspected damages had not occurred or would not occur. If they did, the bond would be used to rehabilitate or repair the environment and to compensate injured parties. Thus, the burden of proof would be shifted from the public to the resource user and a strong economic incentive would be provided to research the true costs of environmentally innovative activities and to develop cost-effective pollution control technologies. This is an extension of the "polluter pays" principle to "the polluter pays for uncertainty as well."

Ecological economic thinking leads us to conclude that, instead of being mesmerized into inaction by scientific uncertainty over our future, we should acknowledge uncertainty as a fundamental part of the system. We must develop better methods to model and value ecological goods and services, and devise policies to translate those values into appropriate incentives. If we continue to segregate ecology and economics, we are courting disaster.


(1) See Costanza, R. (ed) Ecological Economics: the Science and Management of Sustainability. Columbia University Press, New York, (1991) for a multifaceted look at this emerging transdisciplinary approach.

(2) Daly, H.E. and J.B. Cobb, Jr. For the Common Good: Redirecting the Economy toward Community, the Environment, and a Sustainable Future. Beacon, Boston, MA, (1989).
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Author:Costanza, Robert; Wainger, Lisa
Publication:Business Economics
Date:Oct 1, 1991
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