independent pricing and regulatory tribunal home - blue … · 2014. 2. 9. · economic valuation...

Blue Mountains World Heritage Institute ABN 16 108 583 151

Vallentine Annexe, University of NSW Sydney NSW 2052

Tel (61 2) 9385 5653 Fax 9663 1015 www.bmwhi.org.au; [email protected]

August 17, 2011 Re: Submission to IPART review of price structures for metropolitan water supplies

Thank you for agreeing to accept this late submission. Please find attached 2 academic reports

from the University of NSW, which are relevant to the review of pricing of Sydney’s water

supply.

A key point made in the report by Moore is that currently the pricing of water set by the

Sydney Catchment Authority (SCA) and regulated by the Independent Pricing and Regulatory

Tribunal (IPART) does not account for the cost of the ecosystem services provided by the

Greater Blue Mountains World Heritage Area (GBMWHA) which surrounds the Sydney

catchment.

The report by Parker reviews methodologies for measuring carbon storage in forested

ecosystems, explores the role that ecosystems play in carbon sequestration, and proposes how

valuation for these storage services can be supported through legislative, economic, and

policy frameworks.

Regards,

Dr Rosalie Chapple

Executive Director, Blue Mountains World Heritage Institute

IEST5004: Research Project A

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Executive Summary Economic valuation uses methodologies to define and measure value to assist in decision-making (Barron, Perlack & Boland 1998, pp. 193). The use of economic valuation to assist in valuing ecosystem services to promote conservation is increasingly popular. Ecosystem services are “…the benefits people obtain from ecosystems” whereby ecosystems are “…a dynamic, complex of plant, animal, and microorganism communities and the nonliving environment interacting as a functional unit” (Hassan, Scholes, & Ash (ed.) 2005, pp.vvi). The object of this report is to provide the Blue Mountains World Heritage Institute (BMWHI) with a review of the potential application of an economic methodology to the Greater Blue Mountains World Heritage Area (GBMWHA) Ecosystem Service (ES) of water. The GBMWHA is a world heritage listed area covering over one million hectares. Water that passes through the GBMWHA forms the primary catchments that supply over 4 million people within Sydney and the wider area. Multiple threats to the GBMWHA including development and increasing population have placed stresses on the ecosystem service that filters and maintains the water quality and quantity delivered to the catchments. Currently the pricing of water set by the Sydney Catchment Authority (SCA) and regulated by the Independent Pricing and Regulatory Tribunal (IPART) does not account for the cost of the ecosystem services provided by the GBMWHA. The value for the ES of water from the GBMWHA can be calculated through three methods. These methods are developed under a neoclassical economic framework. Choice of method is constrained by financial cost, time and required data.

1. Revealed Preference Method (RPM) reviews data of production/function relationships of observed behaviour.

2. Stated Preference Method (SPM) utilises surveys to derive an individuals Willingness to Pay (WTP) for a service and,

3. Benefits Transfer reassigns data from a similar scenario to the current context. Revealed Preference and Stated Preference methods provide more accurate values than Benefits Transfer but are more financially and time costly. Benefits Transfer provides the least accurate values but is time efficient and cheaper. There is also an option to combine use of Revealed and Stated Preference Methods. This provides the greatest accuracy but requires the greatest amount of data, time and financial cost. Incorporation of these costs, in leading practice is performed through a scheme known as Payment for Environmental Services (PES). PES requires effective legislation and policy creation, stakeholder engagement, education and provision of incentive to ensure success. In analysing and discussing the potential application of the neoclassical economic framework and its methods to the GBMWHA there are many considerations. Application of an economic methodology would provide financial and environmental benefits to the ES of water but the


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concept is also limited. Contenders of economic valuation and its methods express concern regarding use of the neoclassical framework itself that promotes consumptive behaviour, substitutability of unique ecosystems and fails to accurately account for the complex linkage between ecosystems. Accounting for these limitations, application of economic valuation remains valuable to promote ES conservation but must be recognised a tool rather than a panacea. In applying this tool and with respect to constraints it is preferable to use Revealed Preference and Stated Preference Methods. Use of PES to incorporate costs will only be successful if effective policy and legislation promote incentive, education and engagement to use the scheme. Economic valuation of the ES of water from the GBMWHA provides a value that could be incorporated through PES into the current cost. This incorporation could result in adequate funding for ES conservation whilst strengthening the argument to protect the area and maintaining the standard required for continued World Heritage listing.


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Contents 1 Introduction & Purpose ................................................................................................1

1.1 Scope......................................................................................................................2 1.2 Approach & Methods..............................................................................................2

2 Literature Review..........................................................................................................3 2.1 What Constitutes an Ecosystem Service (ES)..........................................................3 2.2 The Benefits of Economically Valuing an Ecosystem Service (ES).........................5

2.2.1 Financial .....................................................................................................6 2.2.2 Environmental.............................................................................................7 2.2.3 Meta-Critique..............................................................................................8

2.3 The Framework for Economic Valuation of an ES ................................................10 2.4 Economic Methodologies to Valuate an ES...........................................................12

2.4.1 Revealed Preference Method (RPM) .........................................................12 2.4.2 Stated Preference Method (SPM)...............................................................13 2.4.3 Other Methods (Benefits Transfer (BT))....................................................13

2.5 Alternatives to the Economic Valuation of an ES..................................................15

3 Case Study: Greater Blue Mountains World Heritage Area (GBMWHA)...............16 3.1 Background ..........................................................................................................16 3.2 Pricing of Water....................................................................................................18 3.3 Threats to the GBMWHA .....................................................................................20

4 Analysis and Discussion...............................................................................................25 4.1 Economic Valuation of the ES of Water from the GBMWHA...............................25 4.2 Economic and Alternate Methodologies................................................................26

4.2.1 Revealed Preference Method (RPM) .........................................................26 4.2.2 Stated Preference Method (SPM)...............................................................27 4.2.3 Other Methods (Benefits Transfer (BT))....................................................27

4.3 Payment for Environmental Services (PES) ..........................................................28

5 Conclusions ..................................................................................................................29

6 Recommendations........................................................................................................31

7 References ....................................................................................................................32


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1 Introduction & Purpose Economic valuation of products and services has long been practiced to measure and define values to assist with decision-making (Barron, Perlack & Boland 1998, pp. 193). At the end of the 20th century, the alarming rate at which biodiversity, ecosystems and their services were being lost or permanently damaged was realised (CBD 2010). Potential for economic valuation to assist in halting this loss was considered. In 1997, two publications amplified the potential of economic valuation in assisting decision-making regarding ecosystems and their services. Nature’s Services: Societal Dependence on Natural Ecosystems (Daily (ed) 1997) and an article in Nature by Costanza, d’Arge, de Groot, Farber, Grasso, Hannon,… & Van den Belt were the first to group together, discuss and analyse various successes of case studies of economic valuation of Ecosystem Services (ES). In the 21st century whilst the complexity of ecosystems is not yet completely understood, knowledge already gathered has provided enough evidence for a call by concerned stakeholders globally to halt continuing loss. Use of economic valuation to assist in this is slowly gaining ground. The importance of valuing ecosystems is recognised internationally by the United Nations (UN) Commission on Sustainable Development (CSD) of which Australia is a founding member. In the last 200 years Australia has recorded the largest documented decline in biodiversity and ecosystems of any continent (DSEWPC 2011). Nationally, interest in economic valuation of ES as a tool for ecosystem conservation is increasing (Stoeckl, Hicks, Mills, Fabricius, Esparon, Kroon, Kaur & Costanza 2011). Commonwealth and State Government legislation and policy has encouraged practical use of economic valuation as a tool in Ecologically Sustainable Development (ESD) for ecosystem conservation (Bates 2010, pp. 206). The Greater Blue Mountains World Heritage Area (GBMWHA) located in NSW provides a number of Ecosystem Services (ES) to the Blue Mountains communities, Sydney and the wider geographic area. The GBMWHA supply of water in particular, provides critical life sustaining service to over four million people and to complex plant and animal ecosystems (BMWHI 2011). Decreasing water quantity and quality trends from the GBMWHA due to numerous factors, pressure the future of this service and the ecosystem itself. Economic valuation as an option to assist in reversing these trends is being explored. Despite the conceived value of the GBMWHA water service, no methodology has been made public that values the ecosystem service of water across the entire GBMWHA or any of its sub-sections. The purpose of this paper is to critically analyse available economic methodologies that quantify the economic value of ES within World Heritage Area (WHA), national parks, wilderness and catchments. With this review the paper then aims to analyse whether any of these methodologies could be appropriately adapted to economically value water provision from the GBMWHA. This paper does not intend to determine a value of the ES provision of water from the GBMWHA.


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1.1 Scope The scope of the paper will include:

• Economic methodologies (within the current neoclassical economic model) applied to WHA, national park/wilderness/wetlands or watersheds aiming to achieve an economic value for the ES of water.

• Critiques/literature reviews, analysis and other publications that consider economic methodologies valuing ecosystem services in particular, the ES of water.

• Research conducted within Australia and internationally

• Research from public and private institutions (subject to accessibility)

• The potential application of methodologies to the GBMWHA ES of water only

• Methodologies that value ES other than water

The scope of the paper will exclude:

• Research performed by an unregistered organisation or group and,

• Unpublished or unverifiable research, methodologies - Accuracy and integrity of material is unknown

• Research in languages other than English - Unable to accurately translate

• Economic methodologies that are inconsistent with the current neoclassical economic model

• Application of methodologies to areas other than the GBMWHA -The project purpose is to establish an adaptable methodology/cost/pricing mechanism that can be applied to the GBMWHA ES of water

1.2 Approach & Methods Initial development of a project brief outlined the project purpose, time, economical and scope constraints. Desktop research tabulated over a two-month period was the primary method utilised to identify relevant literature from all publication forms. Additionally, appropriate individuals involved directly with the GBMWHA and/or water supply were contacted via email and telephone. Feedback regarding the project was obtained from the Blue Mountains World Heritage Institute (BMWHI) project partner and the research supervisor intermittently. The paper will initially provide a critical literature review of what constitutes an ES, a critique of the neoclassical and Total Economic Volume (TEV) frameworks and economic methodologies and a review of the alternate models that can be utilised outside of an economic framework. The paper will then analyse and discuss whether an economic methodology could be applied to the GBMWHA ES of water and provide final conclusions and recommendations.


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2 Literature Review

2.1 What Constitutes an Ecosystem Service (ES) To effectively critique the valuation of an Ecosystem Service (ES), what constitutes an ES must be defined. ‘Ecosystem Service’ is somewhat varied in definition and classification.

A number of publications (Turner, et al. 2003, Farber, Costanza & Wilson 2002, Núñez, Nahuelhual & Oyarzún 2006 and Krieger 2001) referred to ES but did not directly define the term, despite ES underpinning the context of the publication itself. Without a definition, an individual may employ their own meaning of ES and this could affect the overall conclusions drawn by the reader. Definitions of ES framed by utilising a particular school of thought were also noted. As an example, Daily (1997), a qualified ecologist, defines an ES as “the conditions and processes through which natural ecosystems, and the species that make them up, sustain and fulfill human life” (pp. 3). In contrast, Boyd and Banzhaf (2006), both qualified economists, that define an ES as “…components of nature, directly enjoyed, consumed, or used to yield human well-being” (pp. 8). The reader must be aware of these potential influences on the definition of ES when drawing conclusions from the paper. Multiple papers (Cork & Shelton 2000, Stoeckl et al. 2011, Pagiola, Ritter, & Bishop 2004, Voora & Barg 2008) reference the 2005 Millennium Ecosystem Assessment (MEA) series edited by Hassan, Scholes, and Ash for definition and classification of an ES. MEA defines an ES as “…the benefits people obtain from ecosystems” whereby ecosystems are “…a dynamic, complex of plant, animal, and microorganism communities and the nonliving environment interacting as a functional unit” (Hassan, Scholes, & Ash, (ed.) 2005, pp.vvi). As Figure 2.1 illustrates, ES are classified into four categories of supporting, provisioning, regulating and cultural entities. These services provide four constituents of ‘well-being’; Security, basic material for a good life, health and good social relations, that all ultimately provide a freedom of choice and action. It is important to note, that such a popular definition and classification amongst literature does not include biodiversity as an ES but rather an overarching, linking framework (Ninan (ed) 2009, p.136). Cardinale et al. (2006) divert that this may be the case as the complex interrelationship between ecosystem services and biodiversity is only partially understood but remains an active research area (pp.989). Cardinale et al. (2006) highlights that knowledge of the environment is not ‘whole’ and is evolving quickly. As such, definition of ‘ES’ remains highly subjective and prone to change. Whilst Boyd and Banzhaf (2006) argue that a global definition of ES would provide an advantage of standardisation with economical


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accounting this could be disadvantageous within other arenas (pp.1). Given the multiple definitions for ES discovered during this literature review, until standardisation can occur in a manner that is just to all users, analysis of publications and valuations must account for variability in definition. If an ES underpins the context of the publication a definition should be provided. For this reason, the definition of ES provided by editors Hassan, Scholes and Ash within the 2005 MEA series will be utilised within this report. Ninan (ed) (2009) describes this definition as a “productive framework for communicating environmental issues more effectively” (pp. 135).

Figure 2.1 MEA Classification of ES (Hassan, Scholes and Ash (ed) 2005, pp. 28)


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2.2 The Benefits of Economically Valuing an Ecosystem Service (ES)

Benefits, underlying assumptions and disadvantages of economically valuing an ES have been broken down into two primary categories, financial and environmental. Table 2.1 summarises these components.

Table 2.1 Benefits, Assumptions and Disadvantages of the Economic Valuation of ES

BENEFITS ASSUMPTIONS DISADVANTAGES

Financial

• Improves Decision making

• Improves understanding of the value of the environment

• Integrates sustainability into decision making

• Provides a ‘value’ that people can use as a comparison (Internalises an Externality)

• Calculates adequate funding required for ES conservation

• Current Capitalist Model is the ‘best’ model

• Methodologies are relatively accurate in obtaining a value (Right methodology must be chosen)

• All ES can be internalised into a monetary value

• Distribution of payment will be ‘fair’ across a demographic

• Substitutability – Replacement with technological optimism

• Assumes uniqueness is limited

• Knowledge of complexity of ES is limited affecting accuracy of value

• Notion of intrinsic value versus the anthropocentric view of the neoclassical framework.

• How do we account for a deontological ethic?

Environmental

• Strengthens the argument for protection

• Changes the social perception of ES

• The view that the environment is a consumptive variable does not occur

• Policy and legislation will be created and implemented to ensure ES conservation

• Not everything can be valued economically

• Flaws of the neoclassical model affect accuracy of value i.e. the individual is rational


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2.2.1 Financial

In the capitalist framework providers of a service are paid compensation (usually in the form of financial payment) for the continued provision of that service (Erickson, Stephenson, Bradley & Williams 2009, pp. 47). Ecosystems and their services were previously viewed as: Public Goods: Goods and services being ‘public’, meant their use was non-rival and non-

excludable. One person’s use did not affect another person’s use. A river view is a prime example. Any number of people can view the river without affecting anyone else’ view. Everyone realises its aesthetic value but no one has the incentive to pay to maintain the river for that view (McTaggart, Findlay & Parkin 2003) .

Externalities: Externalities result when individual choices affect other people unaccounted for

in the market. For example, industry releases pollutants (individual choice) to make products (market) and public health is affected (individuals not accounted for in the market). Costs of these externalities are unaccounted for within the market (McTaggart, Findlay & Parkin 2003).

Being unaccounted for within the capitalist market has meant that costs necessary to conserve ecosystems and their services have not been incorporated. Consequently, with this failure, provisions from ecosystems decreased. Finances directed towards “fixing” or conserving these ecosystems seldom occurred until decreased productivity from an ES was realised (DEWHA 2009). Finance was directed into ES conservation primarily as a reactive measure rather than a proactive measure. Many ecosystems given their complexity, will function with a support base that is slowly degrading until a collapse results in a near-complete loss of the ES (DEWHA 2009, pp. 5). Salinity within Australia is one example. Removal of native vegetation for agricultural lands has slowly eroded the groundwater tables present to balance salt within the soil leaving many ecosystems significantly compromised. This issue has been slowly occurring for over 100 years but it is only within the last 30 years that salinity has resulted in a fall of economic productivity. Economic loss has triggered government funding to be directed to “fix” the problem (DEWHA 2009, pp. 5). From examples such as this it can be realised that ES does not mirror a ‘public good’ and is currently an externality. Current capitalist framework and associated methods have been adapted to economically value ecosystem services. Use of this framework it is argued, allows costs to be internalised and markets to be created to account for the ‘true cost’ of these services (Ninan (ed) 2009, pp. 135) (Chopra 2003 pp. 81). Revenue from these newly internalised costs, can then be placed, through good policy and legislation, back into projects conserving that ecosystem (Pagiola,


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Ritter & Bishop 2004, pp. 1-3). Management of an ES becomes proactive rather than reactive, lessening the chance of periods of great economic loss and promoting ecosystem conservation. Proponents of economic valuation of ES consider that it assists: • Decreasing the view of ecosystem services as public goods

• Incorporating ecosystem services into the market (internalisation of an externality)

• Sustainable decision making in development, planning, legal and other cases (Pagiola, Ritter & Bishop 2004) (DEWHA 2009)

• Improved understanding of the environment’s ‘value’ that all people can understand and use comparatively (Belmontes, Lopez-Pintor, Rodriguez & Gomez-Sal 1997)

• Adequately conserving an ES with appropriate funding (Ninan (ed) 2009), (Chopra, 2003)

Commonwealth v. Tasmania (1983) popularly known as the ‘Tasmanian Dams Case’ highlights many considered advantages of valuing an ES. Within the case the public considered that the non-use aesthetic value of the Franklin River, was more valuable than provision of hydroelectricity resulting in a landmark legal battle. Economic valuation can also greatly assist planning and development. The New York City decision to conserve the natural watershed over introducing a water filtration plant was made on a primary basis of comparing the annual cost of ecosystem conservation of the watershed versus development and running costs of a water filtration plant. It was estimated through economic valuation that $1.5 billion over 10 years would be spent on watershed protection and conservation to avoid $6 billion in capital costs of providing a water filtration plant to provide the same quality and quantity of water (Postel & Thompson 2005, pp 99-100). These examples also highlight the increasing argument that economic valuation of ES strengthens the argument for protection.

2.2.2 Environmental

A primary conclusion drawn by Dudley and Stolton (2003), from the 2000 World Wide Federation and International Union for the Conservation of Nature’s world commission on Protected Areas (PAs), was that for the long term conservation of PA’s to be assured, the provided services and roles played by ecosystems would require greater emphasis alongside the argument for biodiversity conservation (pp. 2). Dudley and Stolton (2003) advocate that this can be achieved through economic valuation of ES (pp. 68). A degrading ES highlights that current economic measures are inadequate to protect the ecosystem. Through valuing, the costs of conserving that ecosystem to consistently provide the same quantity and quality of service are realised. Costs can then be incurred to user’s through a system known as Payment for Environmental Services (PES) (Dudley &


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Stolton 2003, pp. 4). Costs of the ES have been internalised through the use of PES and the argument to protect these areas has been strengthened with the use of economic modeling. PES has been successfully used in Costa Rica since the late 1990’s. Where previously Costa Rican farmers were deforesting the land destroying many essential ecosystems that contributed to water quality and quantity from watersheds, PES altered their incentives to do so. With introduction of PES over one million trees have been replanted and protection of beyond 1.3million hectares of forest has occurred (Miranda, Porez & Morrano 2003, pp. 45). The argument for protection has met strength with monetary incentive (Dudley & Stolton 2003). Incorporation of PES into private user fees for services changes the perception with which individuals view ecosystems and their interaction with them (Dudley & Stolton 2003, pp. 62). Given that most users of an ES like water, are downstream from the resource, monetary incentive may also assist in decreasing the urban disconnection noted between city dwellers and the environment (Dudley & Stolton 2003, pp. 68). PES requires a number of factors for success. This includes that there must be a high benefit to users further away from the service, distribution of payment must be fair amongst users and incentive for the poor to participate in a scheme should be encouraged (Dudley & Stolton 2003, pp. 62).

2.2.3 Meta-Critique

There are a number of underlying assumptions associated with these benefits. Exploration of this provides a meta-critique on the issue of economic valuing of ES also highlighting some weaknesses present in the reviewed literature. Literature assumes that:

• The current capitalist economic model is the best model to be utilised to value an ES

• That methodologies used to value the ES will create a value that is accurate (accuracy assumes that the revenue gained from internalising the cost is sufficient to ensure continued conservation of the ecosystem at its present baseline).

• All ES can be internalised into a monetary value

• Effective policy and legislation will be put in place to ensure revenue from this newly internalised cost is appropriately utilised for ecosystem valuation

• Effective policy and legislation will be put in place to ensure PES is fairly distributed amongst payers within differing demographics

• Upon valuing ES, their true value will not be compromised for the view that environment has become a consumptive variable

Should these assumptions fail to materialise, benefits of economic valuation may not occur and ES valuation could be disadvantageous.


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Chee (2004) and others highlight issues associated with the economic valuation of ES using the neoclassical framework including that of substitutability, the notion of intrinsic value and the inability to value all components (pp. 551-552). Substitutability in the neoclassical framework implies that for every item there is an equal or better substitute available (Chee 2004, pp. 551). Uniqueness is limited. The technological optimism that the market will force the creation of items that provide a similar or better product is, as Chee (2004) argues dangerous when considering the complexity of ES in the environment (pp. 551). The example utilised is that of a natural fishing area versus a human-made waterbody that has eliminated any microorganisms. The two systems are only similar when considering the number of fish produced for fishing. Should benefits from the natural ecosystem, such as those derived from microorganisms fail to be considered the valuation itself can be skewed due to lacking knowledge of ecosystem complexity (Daily (ed) 1997, pp. 297). Substitutability has only occurred for fish production not the entirety of ecosystem services. The natural water body offers more than the human-made waterbody but the values do not reflect this. Ecosystem and economic loss may result from poorly made decisions based on inadequate knowledge of ecosystem complexity. The assumption that an individual is rational has been heavily debated. As Pearce, Markandya and Barbier (1989) argue, the way an individual acts as a citizen and a consumer differs, highlighting that individual choice changes according to variables that may not be rational (pp. 8). An individual may advocate for sustainable water practices knowing the value of this for the environment, but may make the private consumer choice to purchase non-efficient water devices. Consumerism is also another issue within the neoclassical framework. Economically valuing ecosystems, it is argued, places a “price tag” on nature, making it appear that anything can be valued, even though that price may be inaccurate due to an inability to account for complex ecosystem links. Daily (ed) (1997) argues that the delineation of ES into categories given their complex nature and linkage often to one another is not always possible (pp. 299). The notion of intrinsic value follows on from this concern and questions the actual anthropocentric view of the neoclassical framework. Spash (1997) argues that humans feel a deontological ethic to protect the environment and its ecosystems, regardless of whether we are prepared to consume any services or products it may give us (pp. 406). There is an inability however, to value the ‘protection’ an individual feels towards an ecosystem. The New York Watershed is one such example where delineation of ES into categories was difficult as destruction of one ES would result in the loss of other ES (Postel & Thompson 2005) and there was a high intrinsic notion to protect the ecosystem. Subsequent valuation may present inaccuracies and fail to capture the complexity of ES. Whilst financial and environmental benefits of economically valuing an ES are evident, disadvantages and assumptions associated with these benefits must be recognised and accounted for in decision-making.


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2.3 The Framework for Economic Valuation of an ES The neoclassical framework holds the anthropocentric assumption that humans are of intrinsic value whilst nature and its services are purely of instrumental value. This suggests, that nature and its services are only valuable if they provide humans with a good or service (Meffe and Carroll 1997). Ecocentric and Biocentric frameworks exist that contradict this assumption. Scope constraints of this critique however, place the neoclassical framework as the primary consideration in evaluating economic valuation. Within the neoclassical framework, the Total Economic Value (TEV) is frequently used as a framework to categorise values so that they may then be calculated (Pearce 1993, pp. 17). illustrates that TEV creates two categories, Use Value (UV) and Non-Use Value (NUV). Within the UV category there are three subsections; Direct Use Values (DUV), Indirect Use Values (IDUV) and Option Values (OV). NUV contains only one subsection of Existence Value(EV).

Figure 2.2 TEV Framework for the Economic Valuation of ES (Adapted from Pagiola et al. (2003), pp. 9)

TOTAL ECONOMIC VALUE (TEV)

INDIRECT USE VALUE (IUV)

Value of all components of an ES

that provide benefits/services outside the ecosystem itself i.e.

downstream filtered water

EXISTENCE VALUE (EV)

Value of all components of an ES that humans derive pleasure

from just from knowing they exist

OPTION VALUE (OV)

Value of all components of an ES that are derived from preserving the option to use them (by the individual or their children) in the future. These ES may not be used at present

USE VALUE (UV)

Value of all components of an ES that can be directly and indirectly

used by humans

DIRECT USE VALUE (DUV)

Value of all components

of an ES that can be directly used by humans

i.e. fuel, medicines

NON-USE VALUE (NUV)

Value of all components of an ES that cannot be used by human directly or indirectly but are purely in existence


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Values that are direct and of use are easier to measure economically than indirect or purely in existence values. Often direct and use values have established markets (water quality for example) and direct data relating to the productivity and output of the value (Pagiola, Ritter & Bishop 2004, pp.10). Turner in Perrings et al. (ed) (1997) suggests two primary limitations of the framework:

1. “It fails to fully encapsulate the total secondary value provided by an ecosystem, because in practice some of its functions and processes are difficult to analyse (scientifically) as well as to value in monetary terms” (pp. 134)

2. “The concept of TEV fails to capture the primary value of ecosystems, indeed, the

‘glue’ or life support value notion is very difficult to measure in direct value terms since, it is a non-preference, but still instrumental, type of value” (pp. 134)

Pearce (1993) supports this argument sustaining that TEV may, not account for a total at all as it fails to capture the value of the complex inter-linkage of ecosystems even if it accounts for all the individual components (pp. 23). It is interesting to note, that these flaws suggested by Turner in Perrings et al. (ed) (1997) and Pearce (1993) directly correlate with the issues brought forward by Daily (ed) (1997) in Section 2.2. Daily (ed) (1997) criticises the initial breakdown of ES into categories such as those provided within the 2005 MEA Series as it fails to grasp the complex linkage and reliance that ES have on each other (pp. 299). Pagiola, Ritter and Bishop (2004) do not appear to concede these limitations pertaining that provided the right question of valuation is asked and the methodology used to gather it through this approach is suitable, an appropriate value will be obtained (pp. 14-26). The limitations of the neoclassical and TEV framework are not often reported. Instead the limitations of the methodologies (discussed in Section 2.4) within the approach itself and their effect on value accuracy are often discussed. So whilst a reader may assume inaccuracies with the methodologies, they are unaware of the flaws of the framework itself. The potential cumulative effect from limitations in the framework and the methodologies should be taken into consideration and accounted for. Even if this account is purely recognising the flaws of the framework alongside the flaws of the methodologies utilised. This consideration would provide the reader with a more balanced view of the valuation.


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2.4 Economic Methodologies to Valuate an ES All methods of Ecosystem Service (ES) valuation share a foundation in the theoretical framework of neoclassical economics (Pagiola, Ritter and Bishop 2004, pp.12). Basic economic theory denotes that consumers have an individual preference for goods and services within a market. Preference for the good or service can be measured by reviewing a person’s Willingness To Pay (WTP) or Willingness to Accept (WTA) the loss of the service or good (Pearce, Markandya & Barbier 1989, pp. 8). Three methods measure this preference (Pagiola, Ritter & Bishop 2004, pp. 11):

1. Revealed Preference Method (RPM) 2. Stated Preference Method (SPM) 3. Other Methods/Benefits Transfer (BT)

Within these methods, there are cost/pricing mechanisms to calculate these values. These include hedonic pricing and contingent valuation. Cost/pricing mechanisms alongside method applications, requirements and limitations are illustrated in Table 2.2. Deliberation of these cost/pricing mechanisms in detail is beyond the scope of this report but presents another cumulative layer of consideration that should be acknowledged when valuing an ES.

2.4.1 Revealed Preference Method (RPM)

RPM derives demand and supply from the production-function relationships within data. In this way, utilising a RPM can (Pagiola, Ritter & Bishop 2004, pp. 11):

• Review the effect a change in an ES can have on economic productivity • Trace the impact of a change in ES on measures of health productivity (morbidity and

mortality) • Review the cost of replacing a lost good or ES • Derive demand • Extract the environmental factors on price of goods and ES that include those factors

RPM has the advantage that it is based on observed and recorded behaviours of individuals (Pagiola, Ritter & Bishop 2004, pp. 10). Myrick-Freeman (2003) describes in great detail the complexities of RPM pricing mechanisms but also highlights two very important factors associated with the method. Applying a RPM to a set of data that does not have a market established is considerably difficult if not impossible and large subsets of data are required to ensure accurate preferences are revealed by the considered demographic (pp. 464).

Application of a RPM is relatively simple even with large subsets of data but there are limitations to be recognised (Bann 2002, pp. 11):


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• If a market has not been established, no data exists or there is only a small amount of data, applying a RPM may be inaccurate and values may be skewed

• Market values reflect actual use values, but often fail to account for non-use values and therefore do not encapsulate the Total Economic Value (TEV) of the ES

• The true value of the ES may be underestimated as the RPM fails to capture the consumer surplus (the individual’s WTP above the actual market price)

Use of RPM as Pagiola, Ritter and Bishop (2004) state, works appropriately provided the ‘right questions’ are asked of the valuation. The cost of replacing an ecosystem versus the cost of a change in quality are entirely different values and cannot be transcribed across for use in contexts other than what was intended.

2.4.2 Stated Preference Method (SPM)

SPM directly asks individuals of their WTP or WTA the loss of an ES. The primary method for gaining data involves survey (Pagiola, Ritter and Bishop 2004, pp. 11). Given that a survey can be devised for most scenarios, SPM can be used in most applications of ES economic valuation. Loomis et al. (2000) demonstrates an effective contingent valuation to economically price the cost to restore an impaired riverbed. Bann (2002) suggests a primary advantage to SPM is that the techniques can reveal non-use values not uncovered using RPM for instance (pp. 14). SPM have been used considerably within literature to economically value an ES and have often been used to measure non-use values associated with the ES whilst RPM has been used to measure use values (Stoeckl et al. 2011). However, as Bann (2002) and Chee (2004) state, in order to gain an accurate value, the sampling of individuals and the survey itself must be designed in a sophisticated and impartial way (pp. 14) (pp. 556). Such design and sampling can also incur significant financial and time costs as Loomis et al. (2000) and Birol et al. (2006) concur.

2.4.3 Other Methods (Benefits Transfer (BT))

BT method is both the method and cost-pricing mechanism. Initial use of this method was highlighted in Costanza et al. (1997). It was also within this paper that obvious disadvantages of BT were realised and voiced in debate of the values derived (Belmontes et al.1997). BT relies on data and results obtained from previous economic valuations and seeks to transfer results used in one context into another. The obvious advantage being that this approach is simple, cost and time efficient (Pagiola, Ritter & Bishop 2004, pp. 11). These advantages however, come with significant trade-offs. The categorisation of ES within the neoclassical framework has already been criticised for failing to recognise the uniqueness and complexity of different ecosystems and their services (Daily (ed) 1997). This however, is exacerbated with the use of BT. Whilst RPM and SPM seek to independently value each ecosystem component, BT simply transfer values from one


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previously valued ecosystem components. Multiple authors (Bann 2002, Chee 2004, Pagiola, Ritter & Bishop 2004 and Stoeckl et al. 2011) state BT fails to have regard for the uniqueness and complexity of ecosystems. As such, valuation is often an overestimate or underestimate of the ‘true value’ obtained utilising RPM and SPM. The inaccuracies linked to BT mean derived values are often considered too inaccurate for use in policy and decision-making (Belmontes et al. 1997).

Table 2.2 Method, Pricing/Cost Mechanism, Application, Requirements and Limitations of Economic Methologies

METHOD PRICING/COST MECHANISM

APPLICATION REQUIREMENTS LIMITATIONS

Revealed Preference Method (RPM)

• Production/ Function

• Cost of illness, capital

• Replacement Cost • Travel Cost

Method (TCM) • Hedonic Pricing

• Derive change in ES production

• Derive impact on human morbidity/ mortality

• Cost replacement of a lost ES

• Calculate demand based on travel cost

• Derive environmental factors on the price of products or services that include use of an ES

• Large subsets of data to derive the production/function relationship

• Survey of monetary, distance and time costs

• Prices and characteristics of goods, may involve surveying for valuation

• Data often not available, inappropriate, underestimated.

• Difficulty in valuing some items such as the value of life (cost of human mortality)

• May overestimate costs considerably

• Limited to recreational use and often can only apply to travel to one destination

• Requires large amounts of data that may require a survey to obtain, with cost and time considerations

Stated Preference Method (SPM)

• Contingent Valuation (CV)

• Choice Modelling

• Survey WTP for /WTA loss of a ES

• Survey with preferred option choices

• Survey that derives WTP/WTA across a considerable demographic

• Survey with specific choices that will model WTP/WTA

Survey must be set up well to eliminate bias and derive the most accurate answers. Considerable cost financially and in time to survey.

Other Methods

Benefits Transfer (BT)

Use results from one context in another

Previous valuation exercises at a site with ‘similar’ characteristics

Can be very inaccurate as use of a previous valuation may fail to highlight uniqueness of current ES and skew values


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2.5 Alternatives to the Economic Valuation of an ES Alternatives to utilising economic valuation have been shown to be effective in managing and conserving ES. Advantages of using alternate methods counter the disadvantanges of economically valuation. Primarily, the potential view of an ES as a consumptive, replaceable good does not occur with use of these alternate methods. There are also associated disadvantages to non-economic options. Creation of a citizens panel (known as a citizen’s jury) is a discourse-based method that illustrates a different approach for ES conservation. Decision-making and implementation into policy is done so in the residents interests (Chee 2004). This however, may have issues with bias associated with panel selection and given the complex nature of ecosystems, knowledge may be limited regarding the true issues at hand. Outcomes may fail to truly and effectively manage an ES appropriately. It is suggested that alternate methods to the economic valuation of ES can be used in conjunction with one another rather than independently for effective environmental management (Chee 2004) . Mathematical modelling to illustrate system behaviour or risk of implementing a development for instance can be utilised to guide the citizen’s panel. Proctor and Dreschler (2003) illustrate effective conjunctive use of citizen’s panel and mathematical model methods in the management of an upper Goulburn catchment in Victoria, Australia (pp. 1-22). Literature proposing non-economic methods for valuation also presents weaknesses in the form of underlying assumptions that are not acknowledged. Literature assumes that:

• A citizens panel will gain a demographic that represents an entire community

• That citizens will be able to understand and effectively debate complex issues of ES management with techniques they may not have previously been aware of

• That decisions made will be in the bests interests of conservation of the the ES

As with economic valuation, non-economic valuation options may also be inaccurate in assigning a ‘value’ to account for the complex, unique relationships within ecosystems. Alternatives to economic valuation exist and have been shown to be effective in environmental management. The ‘ecosystem approach’ proposes conjunctive use of economic valuation and alternate methods to ensure good decision making highlighting that no method is a pancea but a tool (Barkmann et al. 2008). Leading practice, in part through incentive in legislation and policy, encourages this idea of conjunctive use of economic and alternate tools for environmental management.


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3 Case Study: Greater Blue Mountains World Heritage Area (GBMWHA)

3.1 Background The GBMWHA (shown in Figure 3.1) situated 60 kilometres inland of Australia’s most populated city, Sydney covers over one million hectares including eight national parks. As the 14th world heritage listed property within Australia, the GBMWHA was listed during the year 2000 by United Nations Educational, Scientific and Cultural Organisation (UNESCO), for its outstanding natural values and biodiversity including unique eucalypt forests and flora, endemic and relict fauna, and dominating, complex escarpments and wetlands (BMWHI 2011). Intricate ecosystems within the GBMWHA form the lungs and basin for over 4 million people and a number of complex plant and animal systems (BMWHI 2011). Water moving through the GBMWHA is subject to a number of ecosystem services that improve the quality and quantity of the water including but not limited to, escarpment and wetland filtering, micro-organism filtering and nutrient turnover, groundwater and salt level control and the provision of aesthetic and cultural significance. Water that is filtered through this system goes onto form catchments for Lake Burragorang and Warragamba Dam, both reservoirs that supply Sydney and the wider area. Past these reservoirs, water from the GBMWHA also supports flow within the Hawkesbury-Nepean and Goulburn-Hunter river systems and forms part of the upper catchment of the Lachlan and Macquarie Rivers (BMWHI 2011).


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Figure 3.1 GBMWHA (BMWHI 2011)


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3.2 Pricing of Water Prior to entering the GBMWHA water is primarily managed by local council authorities such as the Blue Mountains City Council (BMCC). Once within the GBMWHA, co-management occurs with the State Government Office of Environment and Heritage (OEH), local city councils, advisory groups and NGO’s. Management of water that is received from the GBMWHA into storage, to supply Sydney and the wider area, falls under the responsibility of the Sydney Catchment Authority (SCA). SCA has the role of maintaining healthy catchments to ensure quality water that is stored can be sold to private groups such as Sydney Water (SCA 2010). To price water for re-sell to private organisations, the SCA must submit a price per unit of water to the economic regulator, the Independent Pricing And Regulatory Tribunal (IPART) of NSW. IPART regulates utilities that the government have a monopoly upon, such as water, and decides if that pricing submission is in accordance with a number of principles including equity (Cox 2010). Submission of a price from the SCA is based upon marginal costing* that is heavily dependent on the capital (the amount of water stored for instance) available (Booth 2004). Once a price has been set, the SCA sells water to Sydney Water who then sell water to the public. Figure 3.2. illustrates this system. Marginal costing does not incorporate externalities. Marginal costing completed by the SCA does not include a value for the Ecosystem Service (ES) of water from the GBMWHA placing it as an externality. It has however, been suggested in submissions made to IPART that the value of the ES be considered within the price (Booth 2004). A sector of sale revenue of water from the SCA to private industries is fed back into schemes to ensure healthy catchments (SCA 2010). The sale revenue occurs when the water is sold at a higher than marginal cost price. *Marginal Cost = Change in total benefit resulting from a one unit change in output (McTaggart, Findlay & Parkin 2003).


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Figure 3.2 Management of Water from the GBMWHA to Sydney and the Wider Area

SYDNEY & THE WIDER AREA

CONSUMERS

Private Organisations

(Sydney Water)

Independent Pricing And Regulatory

Tribunal (IPART)

Sydney Catchment Authority

(SCA)

STATE/LOCAL COUNCILS/ ADVISORY GROUPS/NGOS

Within GBMWHA

ES Of Water

Revenue to conserve

catchments Submit price via Marginal Costing

Sell Water to

Sell Water

To

Approve/ Disapprove Pricing

Pay for

Water


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3.3 Threats to the GBMWHA The GBMWHA faces considerable threats that have significantly affected ecosystem resilience and the services it provides. In considering water flow through the GBMWHA, threats that may directly affect water quality and quantity production include but are not limited to (BMWHI 2011):

• Climate change • Introduced flora and fauna species and pathogens • Deforestation of surrounding areas • Urban and rural development • Increased demand for water (Increased Population) • Urban water runoff • Upstream effects including mining, agriculture and poor water management • Inadequate funding for conservation

Figure 3.3 illustrates a concept map of the threats to the GBMWHA Ecosystem Service (ES) of water. Ass illustrated increasing development and population surrounding the area has been a potential primary cause for the increased stress placed on the GBMWHA ES of water. With increased population comes increased demand for development and resources. To account for this demand, activity such as mining and agriculture around the GBMWHA has increased leading to deforestation of the surrounding area, increasing heavy metals and siltation pollution in water leading into the GBMWHA, groundwater table damage and altered hydrology. These entities have threatened the health of the ecosystem itself and placed significant stress on the service of water it provides. Increasing population and development amongst other threats have contributed to a number of trends indicating ecosystem degradation within the GBMWHA.


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Figure 3.3 Concept Map of the Threats to the GBMWHA Ecosystem Service of Water

THREATS TO THE GBMWHA ES OF

WATER

POPULATION

DEVELOPMENT + ROADS

DEMAND FOR RESOURCES

SILTATION RUNOFF

LACKING EDUCATION & INCENTIVE TO MAINTAIN ECOSYSTEM

AGRICULTURE

USE OF HEAVY BROAD

PESTICIDES + NON-NATIVE

SPECIES

INVASIVE FLORA AND FAUNA

NATURAL VEGETATION

POOR EDUCATION TO THE BLUE MOUNTAINS, SYDNEY

AND THE WIDER AREA

WASTEFUL/ INEFFICIENT WATER USE

DAMAGE TO NATURAL AQUIFIER SYSTEMS

INADEQUATE MANAGEMENT

ALTERED HYDROLOGY CLIMATE CHANGE

DEFORESTATION OF SURROUNDING AREAS

UPSTREAM ACTIVITIES -

MINING

INADEQUATE FUNDING

PRECIPTATION OVER GBMWHA

FAILURE TO

CONSERVE


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Figure 3.4 Approved residential development within the Blue Mountains NSW 1995-2009 (BMCC 2011)

Increasing development within the Blue Mountains can be seen in Figure 3.4. The downward trend over 2004-2008 is attributable to a change in development legislation in an attempt to ‘curb’ development. Since 2008, development around the GBMWHA has begun to rise again.

Figure 3.5 Actual Population Blue Mountains City 2006-2011 Forecast Population of Blue Mountains City 2012-

2031 (BMCCa 2011)


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Population highlighted above in Figure 3.5 demonstrates an actual increase from 2006 and a projected increase up until 2031. Both development and population exhibit upward trends placing significant stress on the ecosystem service of water. Figure 3.6 demonstrates from 1999-2006 the number of ecological communities, plants and animals that were identified as threatened under the Threatened Species Act (TSA) (1995) and Environment Biodiversity and Protection Conservation Act (EBPC) (1999) have risen. The increasing trend can be attributed to increasing populating, development, deforestation of natural vegetation and introduction of weeds and invasive species and pests. Loss of these components of an ecosystem can have significant effects on the ability of that ecosystem to adequately function and continue to produce the same services.

Figure 3.6 Threatened Ecological Communities and Species within the GBMWHA 1999-2006 (StraliaWeb 2007)

A 10-year trend analysis of water quality indicates some degradation of the service. Increases in pH, nitrogen levels and heavy metal concentrations were identified across Lake Burragorang and Warragamba Dam. Primary cause of these increases has been attributed to increased upstream activities such as mining. Such increases affect and damage ecosystem functioning, negatively affecting the ability of the GBMWHA to produce water of the same quality as previously registered (SCA 2010). Decreasing water levels within Warragamba Dam since 2002 have been noted whilst other smaller catchments have remained relatively in status quo. An increasing population within Sydney and the wider area alongside significant drought has lead to increased stress on Warragamba Dam as the primary water supply for Sydney. Whilst the water levels have begun to rise again, they have yet to reach the 2002 level. Decreasing dam levels highlight a drop in water quantity being received from the GBMWHA ES of water. Water is critical for optimal ecosystem functioning and delivery of service. Causes of this drop in quantity include that the:


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• Demand for water has outstripped the natural supply, • Loss of water to the ocean (sewerage discharge) has resulted in a decrease in

precipitation over the GBMWHA (altered hydrological cycle) • Poor, inefficient water practices have resulted in significant wastage and loss of

water from the hydrological cycle (SCA 2010)

Warragamba Dam All other Dams suppling Sydney and the Wider Area

Figure 3.7 Warragamba and all other dams supplying Sydney and the wider area levels 2002-2009 (I Live in Sydney.com 2011)

To maintain a WHA listing, the area must be managed at the same relative standard, which is reported periodically to UNESCO (UNESCO 2011). Within Australia, Commonwealth and state legislation have deemed that economic incentives and valuation be considered as a principle of Ecologically Sustainable Development (ESD) to be utilised with development and conservation of the environment including world heritage listings. Benefits of economic valuation of ES reviewed in Section 2.2, would appear to assist in conserving this ES. To date, there has been no economic valuation of the ES of water within the GBMWHA that has been released publicly. Potential for the application of economic valuation to the ES of water from the GBMWHA will be analysed within Section 4.


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4 Analysis and Discussion To analyse whether economic valuation of the Ecosystem Service (ES) of water within the GBMWHA is feasible, the leading practices and principles reviewed within Section 2 will be considered alongside the current situation of the GBMWHA. This paper does not seek to provide a value of the ES of water from the GBMWHA but seeks to analyse and discuss, based on current literature whether the adaptation of an economic methodology is viable.

4.1 Economic Valuation of the ES of Water from the GBMWHA Financial and environmental advantages of implementing economic valuation would be of considerable benefit to the GBMWHA. Downward trends in the water quality and quantity from the GBMWHA and increasing pressure from rising developments certainly suggest that using economic valuation to strengthen the argument for protection and internalise costs associated with that conservation could be advantageous. It is a considerable sign, as Dudley and Stolton (2003) suggest, that degradation of an ES suggests management is somewhat deficient and something must be done to assist in halting the degradation. Given that the GBMWHA is world heritage listed there is also a requirement to periodically report to UNESCO on the state of the area. With degradation already occurring and significant threats potentially perpetuating this, economic valuation to assist in halting that degradation presents an opportunity. Use of economic valuation could assist in decision–making in policy and development. As Pagiola, Ritter and Bishop (2004) state however, the right questions must be asked of the valuation and those values cannot then be transferred across for use in another context. To calculate the cost of replacing the GBMWHA with a water filtration plant will create a value significantly different than the comparative value of changing water quality received from the GBMWHA. For one instance, the number of ecosystems affected with calculating a replacement cost is considerably greater and it is here, that the complex linkage of ecosystems must be addressed. Whilst Total Economic Value (TEV) may categorise values, the valuer must be careful to avoid the development of unaddressed externalities that may significantly alter the value outcome. Wherein, Postel and Thompson (2005) outline the decision made to conserve the New York watershed versus replacement with a water filtration plant, the TEV framework accounted for ES values outside of the ES water supply. Given that destruction of a watershed would result in significant changes in other ecosystems, the value accounted for far more than a pure loss in water quality and quantity. Pagiola, Ritter and Bishop (2004) recommend caution when calculating the replacement cost of an ES as it tends to be an overestimation of the ‘actual value’ (pp. 11). Perhaps however, it is a reflection of the complex linkage of ecosystems and highlights that the TEV framework may fail to capture these complex links. It also highlights that there is no right or wrong set up of a TEV. As every ecosystem and its service are unique, the TEV will reflect this. In this way there is no recipe and valuers must ensure that they address each component they believe contributes to the TEV. This of course will also change according to the individuals deliberating on the case.


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As Stoeckl et al. (2011) suggests, in leading practice, economic valuation should not consider just one variable of the ES (such as soil nutrient turnover) but it also should not attempt to add services together. The ability to neatly categorise these services and their components however, remains contentious and based upon the valuer’s underlying assumptions and knowledge. Society functions with a capitalist, neoclassical economy, the limitations of that system must be recognised. The GBMWHA is a highly unique area with complex ecosystems. Neoclassical economics holds the assumption that substitutability exists with technological optimism. It remains debateable however, that a water filtration plant is in someway similar to the ES provided by the GBMWHA. Whilst the goods and services received from the GBMWHA are of interest to individuals, there is also an intrinsic value that individuals hold for the GBMWHA regardless of the goods and services it provides. This perhaps is also a reason that protection of the area is sought outside of the consumptive uses the GBMWHA provides. This intrinsic value however, cannot be calculated and indeed, perhaps a “price tag” cannot be placed on every component of an ES. Recognising these limitations and gaps within current benchmarking literature, economic valuation proposes three methodologies with which to value an ES within the TEV framework.

4.2 Economic and Alternate Methodologies This report has the option of considering three methodologies; Revealed Preference Method (RPM), Stated Preference Method (SPM) or Other Methods (Benefits Transfer - BT). All methods could be employed in valuation of the ES of water from the GBMWHA but constraints associated with accuracy, finance and data affect which methods might be employed. Water has an established market and pricing set up within NSW as previously reviewed. Implementation of costs into the already established pricing mechanism and market could therefore, be easier than with ES that do not have market. The ES of water also has considerable data stretching over ten years regarding water quantity and quality from the GBMWHA. Changes in quality and quantity and their causes can additionally be delineated from the data providing key information on the value of ES in affecting the quality and quantity of the water. Access to this data however may be affected by authority and privacy regulation. Additionally, deciphering the data would require input from multiple experts including hydrologists, economists and scientists that would have associated financial and time costs.

4.2.1 Revealed Preference Method (RPM)

Use of a RPM to measure certain ES values especially including but not limited to reviewing the changes in productivity given a trend may be particularly relevant in this case. Whilst the water quality delivered to consumers is always at the same relative level, water quality received


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at the SCA and private organizations such as Sydney Water is not. The cost of bringing that water up to the same quality could be used within the RPM methodology to cost the value of ES variables that perform the same activity (such as micro-organism filtering). RPM is a recommended leading practice when valuing ES. It is however, highly data intensive and as previously stated the cost of analysing and reporting that data may be significant. Additionally, in deciphering the data, creating a direct cause-effect relationship may be difficult given the complexities associated with ecosystem function. The opportunity to use a RPM could be considered only in cases where a direct cause-effect relationship could be deciphered.

4.2.2 Stated Preference Method (SPM)

The option of SPM should also be considered for other variables for which use of RPM is not possible. SPM may assist in valuing ecosystem services that do not have sufficient data or a direct cause-effect relationship cannot be defined. This methodology might also be employed to average a result between SPM and RPM strengthening the accuracy of the valuation as suggested by Adamowicz, Louviere and Williams (1994). SPM does have significant cost, time and accuracy constraints. Design of a survey that minimises bias and delivery across an appropriate demographic are significant challenges associated with SPM. The conflict of the individual as a consumer and a citizen must also be considered, given that an individual can provide a WTP (Willingness To Pay) higher or lower than they would actually employ in everyday life. Barron et al. (1998) also suggests the use of a SPM with non-economic methods such as citizen’s jury and mathematical modelling strengthens the valuation (pp. 46). Once again, the issue of cost and time heavily dictates the options available to use and the perceived validity of the values calculated.

4.2.3 Other Methods (Benefits Transfer (BT))

Leading practice has suggested minimal use of BT due to inaccuracies but it remains the cheapest methodology to employ given time and financial constraints, as it relies on data and results obtained from previous economic valuations. BT is often used in situations where direct data is not available for the ES value. Given that data is available in this case, the need to transfer values across may not be necessary. The constraints of time or finance however, may influence the method/s chosen. The temperate forests within the GBMWHA have also been stated to resemble the forests within South Africa where some economic valuation of ES has been employed. The assumption that any forest ecosystem could be similar to another however, is highly debatable. Given that utilisation of BT is also not leading practice, the accuracy of the valuation could also be called into question affecting the use of the valuation in future decision making. Table 4.1 demonstrates a comparative representational view of the economic methodologies and their considerations. Ultimately the choice of method/s employed will be based upon these constraints.


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Table 4.1 Economic Methodology versus Constraints – A Comparative Representational View

METHOD/ CONSTRAINTS

RPM SPM RPM & SPM BT

Data High High + High ++ Moderate

Financial Cost Moderate High + High ++ Low

Time Moderate High + High +++ Low

Accuracy High High High ++ Low

In this way, whilst use of economic valuation would be beneficial and highlights a necessity to act against the degradation of the ES of water, the complexity of performing the valuation itself, suggests it forms just one potential tool with which to act. Incorporation of the cost must also be considered.

4.3 Payment for Environmental Services (PES) The leading benchmark suggests use of Payment for Environmental Services (PES). Indeed, there are few other discussed options. But as Dudley and Stolton (2003) have made clear, the institutional framework of this scheme still requires significant work to bring it to a fully functioning level. The incorporation of PES in Costa Rica has been highly successful but a number of conditions have been met including that downstream users have been convinced that ES conservation will provide cost effective water supply. PES rests on the assumption that strict policy and in some cases, legislation alongside strong forest-hydrology links can shape and control the scheme. The implementation of PES for the GBMWHA ES of water appears feasible especially but not limited to the fact that downstream benefits are so high. In this way there would be a high WTP (Willingness to Pay) for such service. The set up of the scheme however, would require consideration of many elements notwithstanding the primary element that the ES of water from the GBMWHA would require economic valuation. Whilst financial incentive to use the scheme is the primary concept, development of that incentive requires significant education delivered to stakeholders. Stakeholders must be made aware that an ES is being provided by the GBMWHA to deliver water of a quality and quantity that would otherwise not exist. Grounded understanding that services are provided by the GBMWHA are of significant value is essential to the success of implementing payment for those services.


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5 Conclusions The Greater Blue Mountains World Heritage Area (GBMWHA) provides an ecosystem service that improves the quality and quantity of water delivered to Sydney and the wider area. With increasing population and development, increased stressors have been placed on the GBMWHA affecting the ability of the ecosystems to deliver water of the same quality and quantity. Degradation of this Ecosystem Service (ES) is apparent in water quality and quantity trends. Current funding of the GBMWHA has failed to account for this degradation. To remain World Heritage listed, the GBMWHA and its ecosystems must remain at the same relative standard with which they were approved. Continuing ecosystem and biodiversity loss has prompted legislation and policy within Australia to encourage the use of economic valuation of ecosystem services. Financial and environmental benefits are apparent with the use of economic valuation as a tool. Economic valuation is considered to decrease the view of ES as public goods and internalise the cost of these services into the market. This assists greatly with development and policy planning to promote ecosystem conservation through adequate funding and strengthening the argument for protection. The framework and methodologies of economic valuation are not without limitation. Calculation of an economic value is subject to assumptions laid down by the valuer/s. Failure to incorporate all components of an ES can occur and an inability to account for the complex linkage of ecosystems and biodiversity itself is apparent. Authors have also expressed concern that economic valuation encourages the view of the environment as substitutable, consumptive and of pure extrinsic value. Current water pricing from the Sydney Catchment Authority does not internalise the costs of conserving the ES of water from the GBMWHA. Current funding and management has failed in conserving the ES of water from the GBMWHA. Use of economic valuation as a tool to assist in conservation of this ES would be advantageous if it should provide its expected benefits. The method/s chosen to value the ES of water is dependent upon constraints of data, time and finances. Revealed Preference Method (RPM)

- Derives production/function relationships from observed behaviours - Accuracy is high as values are calculated from observed behaviours - Is data intensive and has considerable financial and time expenses - May be appropriate to value components of the GBMWHA given that data on water

quality and quantity is available for review but, - May only be appropriate for those ES components where a direct cause-effect

relationship has been established


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Stated Preference Method (SPM)

- Surveys individuals on their Willingness to Pay (WTP) for services - Requires large survey set up and time administering those surveys - Is cost and time expensive - May have issues with bias in survey set up and delivery - May have some inaccuracy if the consumer-citizen factor is involved - Can be applied to components of the GBMWHA ES of water where there is no data to

assess WTP through a RPM Other Methods (Benefits Transfer –BT)

- Uses data from a ‘similar’ economic valuation and seeks to use those results n another context

- Financial and time cost effective - Highly criticised for inaccuracies due to the assumption that ES are similar in multiple

ecosystems

Revealed Preference Method (RPM) & Stated Preference Method - Highly accurate - Data intensive - Significant financial and time costs

Internalisation of ES costs could be done through the Payment for Environment Services (PES) scheme. PES is the current leading practice for implementation of ES costs. PES is highly successful if there is a large WTP downstream of the ES. PES provides a scheme to provide financial incentive to stakeholders to conserve ecosystems. Success of the scheme would require significant legislation and policy development alongside considerable education to stakeholders regarding ecosystems, their services and their inherit value. The limitations of economic valuation must also be recognised. Economic valuation of ecosystem services must be recognised as a tool, not as an overall solution. It is preferable to use Revealed Preference and Stated Preference Methods over Benefits Transfer for calculating the value of the ES of water. It is also preferable to use economic valuation in conjunction with non-economic methods. Choice of method/s utilised will be constrained by data, time and financial cost. Economic valuation of the ES of water from the GBMWHA provides a value that could be incorporated through PES into the current cost. This incorporation could result in adequate funding for ES conservation whilst strengthening the argument to protect the area and maintaining the standard required for continued World Heritage listing.


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6 Recommendations Based upon the above conclusions the following recommendations have been suggested.

• The option to use economic valuation to value the ES of water should be considered as a tool for ecosystem conservation

• If economic valuation is considered as a tool for use within the GBMWHA; - A review of the cost-pricing mechanisms (hedonic pricing etcetera) within the

methodologies should be undertaken to fully analyse the applications, advantages and limitations of each with regards to the GBMWHA

- Research into the data available for analysis should be completed - Discussion with multiple experts including economists, scientists and policy-

makers should be undertaken to decide which methods (RPM, SPM or BT) and cost-pricing mechanisms within the neoclassical framework are most appropriate to be utilised given data, time and financial constraints

• A review of alternate methodologies to manage the ES of water should also be

considered and further researched

• If the value of the ES of water is to be incorporated into user fee’s: - Further research into PES should be completed regarding initial scheme set up

and longer term management - Research into other payment scheme options should also be researched


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7 References Adamowicz, W., Louviere, J. & Williams, M. 1994, ‘Combining Revealed and Stated Preference Methods for Valuing Environmental Amenities’, Journal of Environmental Economics and Management, vol. 26, issue. 3, pp. 271-292. Bann, C. 2002, An Overview of Valuation Techniques; Advantages & Limitations, Special Report for Asean Biodiversity, Asean Biodiversity, United Kingdom. Barkman, J., Glenk, K., Keil, A., Leemhuis, N., Dietrich, N., Gerold, G. & Marggraf, R. 2008, ‘Confronting unfamiliarity with ecosystem functions: The case for an ecosystem service approach to environmental valuation with stated preference methods’, Ecological Economics, vol. 65, issue 1, pp. 48-62. Barron, W., Perlack, R. & Boland, J. 1998, Fundamental Economics for Environmental Managers, Greenwood Publishing Inc., USA. Belmontes, J., Lopez-Pintor, A., Rodriguez, M., & Gomez-Sal, A. 1997, ‘On the Usefulness of Ecosystem Service Valuations’, Pirineos, vol. 149-150, pp. 145-152. Birrol, E., Karousakis, K. & Koundouri, P. 2006, ‘Using economic valuation techniques to inform water resources management: A survey and critical appraisal of available techniques and an application’, Science of the Total Environment, vol 365, pp. 105-122. Blue Mountains City Council (BMCC) 2011, BMCC, Katoomba, viewed 20/05/2011, < http://profile.id.com.au/Default.aspx?id=212&pg=101&gid=10&type=enum/>. Blue Mountains City Council (BMCCa) 2011, BMCC, Katoomba, viewed 20/05/2011, < http://forecast2.id.com.au/Default.aspx?id=212&pg=5000>. Blue Mountains World Heritage Institute (BMWHI) 2011, BMWHI, Sydney, viewed 25/11/2010, <http://www.bmwhi.org.au/contact.html>. Booth, J., 2004, Department of Environment and Conservation (DEC) Submission to the Independent Pricing and Regulatory Tribunal (IPART), Submission Report, DEC, Sydney, Australia. Boyd, J. & Banzhaf, S. 2006, What Are Ecosystem Services: The Need For Standardised Environmental Accounting Units, Discussion Paper for Resources For the Future (RFF), RFF, Washington U.S.A. Cardinale, B.J., Srivastava, D., Duffy, E., Wright, J., Downing, A., Sankaran, M. & Jouseau, C. 2006, ‘Effects of biodiversity on the functioning of tropic groups and ecosystems’, Nature, vol.443, pp. 989-992. Chee, Y. 2004, ‘An Ecological Perspective on the Valuation of Ecosystem Services’, Biological Conservation, vol. 120, pp. 549-565.


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