Accounting for the True Value of Our Ecosystems
Sjak Smulders
Tilberg University, Netherlands
Winning article: Accounting for the increasing benefits from scarce ecosystems (Science, 2024)
“With only a handful of readily available numbers, the cost of approaching planetary boundaries can be brought into the decision process in a much more accurate and implementable way than in current practice.”
Beyond nature’s intrinsic value, Earth's ecosystems deliver tangible benefits that are foundational to human survival and economic prosperity. From the fruits we harvest to the timber we build with, these ecosystem services are integral to our daily lives and global markets. However, many of these services are not associated with market value; water and air purification by forests, soil nutrient cycling by earthworms, recreational and aesthetic enrichment, and the value we attach to the existence of diverse species. A lack of market value attribution to these vital processes leads to a lack of perceived value at all. This results in policy decisions that fail to account for the full spectrum of benefits ecosystems provide. This oversight can lead to underinvestment in conservation and sustainable practices, exacerbating environmental decline. There are multitudes of philosophical and practical challenges involved in attributing monetary value to these ecosystem services, but it is an essential endeavor if we want to drive the incorporation of this into policy frameworks/models.
To address this, we propose the use of 'shadow prices', monetary estimates reflecting the true value of non-market goods and services. By assessing individuals' willingness to pay (WTP) for specific ecosystem services, we can approximate their economic value. This approach involves analyzing behaviors such as housing choices, travel patterns, and even charitable donations to environmental causes. For instance, the premium someone is willing to pay for a home near a park can indicate the value they place on green space. Existing consumer tracking information can be drawn upon to inform policy models on the position of the consumer to appreciate or invest in ecosystems.
It is also paramount to understand that WTP is dynamic and evolving. It is derived from two primary factors: the real income effect and the real scarcity effect. As real incomes grow, the larger the budget people can allocate to both market and non-market goods, the more they can increase their WTP for ecosystem services. Simultaneously, as ecosystems decline, WTP for their services rises because these resources become scarcer, both in relative and absolute terms. This effect is accelerated by the stagnation and decline of ecosystem service availability. To reflect the value of ecosystems accurately, policy models must integrate predictors for future WTP, with the understanding that ecosystems are continuing to decline, and therefore adjust their investment strategies accordingly.
To implement this shift, governments should immediately begin incorporating the real income effect into policy analyses, ensuring that WTPs increase proportionally as real incomes grow. This is a pragmatic starting point, as it applies to all ecosystem service benefits and aligns with existing methodologies for valuing travel time and health benefits. GDP growth forecasts are readily available, while forecasts for ecosystem services require further research. Where data on ecosystem service decline exists, real scarcity effects should also be integrated into policy models. Governments should periodically revise their policy guidance as new evidence emerges and consider establishing advisory groups to synthesize research on income and scarcity effects.
Figure 1. The colored lines show how the willingness to pay for biodiversity increases over time. This is driven by the combination of (i) the income effect (income grows at 1.7% annually in all cases) and (ii) the biodiversity scarcity effect as represented by the Ecosystem Services Decline Rate (EDR). The case EDR=0% represents stable ecosystem services, while EDR=0.1% represents a decline of 0.1% annually. Several estimates of ecosystem services trends are used, reflected by global forest area (0.1%), species conservation status according to the International Union for the Conservation of Nature (IUCN) Red List Index for threatened species (0.4%), and biodiversity as reflected by the Living Planet Index (2.8%).
Ecosystem services should be treated with the same economic rigor as market goods, ensuring that their value adjusts over time in response to income growth and resource scarcity. As governmental guidelines evolve, this approach will provide a critical framework for incorporating changing ecosystem values into economic decision-making. Applying a relative price change rule would ensure that the importance of scarce ecosystems for future generations is adequately reflected in public investments, regulatory evaluations, and sustainability initiatives. This fundamental shift will drive more responsible and forward-thinking policies that recognize the indispensable role of ecosystems in human well-being and economic resilience.