Are some ecosystem services incorrectly calculated as avoided costs?

Valuing ecosystem services is messy business. A valuation exercise must first clarify the philosophical framework used. The ecosystem services described in the Millennium Ecosystem Assessment (MA) clearly align with the anthropocentric and utilitarian philosophy adopted by mainstream economists (MA 2003). This philosophical origin is important for understanding the MA’s definition of ecosystem services. Recall that the MA defines ecosystem services as “the benefits that people obtain from ecosystems” (MA 2003). If ecosystem services are defined as benefits to people, then one must review how economists conceive of benefits.

Economists define benefits in terms of willingness to pay and consumer surplus. This description of benefits slightly diverges from everyday usage. As a result, users of the ecosystem services framework have attributed values to ecosystem functions that are misplaced. Proponents of ecosystem services frequently confuse avoided costs with benefits. The difference between these concepts is clear when one considers that the expenses associated with an infrastructure project are totally independent from the factors that determine willingness to pay or consumer surplus. Nevertheless, the confusion between avoided costs and benefits has persists.

The avoided cost method of valuation, if it can be considered a valuation method at all, estimates the value of an ecosystem service by calculating the cost of a human made substitute. The value of a wetland, for example, would be the cost of constructing and maintain a sewage treatment plant that performed similar services. This mistaken logic is even used in the well known example of drinking water in New York City. In the 1990s New York City water managers needed to improve the quality of its drinking water to meet new EPA standards. The initial proposal planned for the construction of a new filtration plant at the cost of USD $6 to $8 billion, plus $300 million per year in maintenance (Chichilnisky & Heal 1998, National Research Council 2000). But city officials found it cheaper to invest in the protection of the Catskill watershed at only a fraction of the cost. The intellectual inconsistency is to claim that the value of the ecosystem service was the avoided cost of constructing the filtration plant, or the difference between the planned expense and the watershed management plan. Such a claim incorrectly adds expected costs to the benefits ledger. There is no question that the watershed protection approach used by New York City officials was a win-win solution for land conservation and municipal finance. This criticism only clarifies what may fairly be considered a quantifiable benefit of an ecosystem function.

The hydrologic service of “water damage mitigation” cited by Kate Brauman and colleagues (2007) is another example that confounds benefits and avoided costs. Flood damage is a cost associated with land development. When homeowners pay to repair damage after a flood, they are paying a cost associated with living near a river or the cost of increased peak flows provoked by impervious surfaces upstream. If homeowners more pay more or less, these expenses should not influence the benefits associated with river protection. The distinction between costs and benefits are critical, and yet this distinction is confused by distinguished leaders in the field publishing in well respected journals (Brauman et al. 2007).

The confusion between benefits and avoided costs is perhaps the most common mistake in the current discussion on ecosystem services. However this distinction should be made clear to maintain consistency and improve academic rigor. This may result in reducing the “benefits” frequently attributed to ecosystem services. The danger in this confusion is that proponents of ecosystem services are inadvertently overstating the value of ecosystem services.