Unlocking the Economic Value of Nature-Based Solutions
Where Ecology Meets Economics in Infrastructure Decisions
Technological progress in engineering design and materials continues to expand what is possible. At the same time, growing awareness about the negative legacies of hardscape structures, including high maintenance cost burdens, potential obsolescence, changing interests, and growing vulnerabilities to high-hazard weather conditions, has elevated interest in the suitability of nature-based solutions (NbS) as alternatives, especially in enhancing long-term resiliency. But how does NbS stack up against conventional engineering from an economic perspective?
We explore here how the economics of nature-based solutions as infrastructure alternatives can be compared to conventional engineering solutions, especially in the context of capturing the value of ecosystem services made possible by NbS. In addition, we outline best practices in economic valuation, contrasted with more simplistic and potentially misleading approaches.
What are nature-based solutions?
Many variations on the definition of NbS exist, though they typically capture the same fundamental message: Actions aiming to address social, economic and environmental challenges by protecting, conserving, restoring, and sustainably managing ecosystems. In this regard, NbS entails a wide variety of engineering solutions aimed at supporting natural ecosystem functionality. NbS are economically evaluated like any other conventional engineering solution by comparing benefits to costs. What sets NbS apart from conventional engineering solutions is that NbS designs can generate ecosystem services (ES), resulting from a wide range of ecosystem functions that generate value to people. For example, an NbS that includes restoring coastal wetlands can provide a variety of ES such as flood protection, recreation and carbon sequestration. These functions are sometimes classified as provisioning, regulating, cultural or supporting to differentiate key characteristics and analytical approaches. Generally, though, if it happens that a particular NbS generates higher lifecycle costs than a conventional hardscape design but also generates significant ES benefits, the project could be viewed as a better total net value. In other contexts, NbS could be achieved with lower total lifecycle costs because ecosystems "do the work." For instance, where constructed wetlands retain flood waters that could reduce flood risk and management costs downstream.
What are the economics of ecosystem services?
ES represent the ‘outcomes’ of a healthy environment. Depending on the type of NbS, potential services could include clean and plentiful air and water, biodiversity conservation, biological productivity, enhanced resilience, or climate stabilization. NbS can provide more direct tangible benefits to people, including outcomes related to recreation, culture, and aesthetics, as well as food, fuel and materials. So, how do you assign monetary value to ES? Here are the key features of ES economic valuation:
- Anthropocentric: ES are valued from a human-based perspective, not based on how other species would value them. That is, by the sheer fact that ES are valued in monetary terms, ES are valued anthropocentrically.
- Non-market: For many ecological functions that generate ES, no markets exist to observe transactions and prices. Accordingly, ES are often classified as non-market measures, and their value must be inferred indirectly by observing people’s market-based purchases related to ES.
- Site-specific, quality- and quantity-based: ES valuation often depends on existing ecosystem conditions, project scale, and level of change in productivity and outcomes.
- Separable benefits: To avoid ‘double-counting’ ES benefits, it is important to verify that NbS outcomes generate benefits separately. For instance, if NbS improves both total suspended solids and dissolved oxygen in surface waters and, in turn, both improve biological productivity, ES would be valued by the combined effect. Further, these combined outcomes may have separate and additive benefits for different types of fisheries (e.g., striped bass and crabs in an estuary).
How do we measure specific ES values?
Several economic methods are now well established for estimating the value of ES, but there are certainly trade-offs in applications for specific NbS projects. For instance, the most accurate valuation method would entail a site-specific analysis of how the ES generates a change in value for people, especially in translating changes in, say, biological productivity (e.g., improved nutrient balance) from the NbS to anthropogenic outcomes that have an indirect market value (e.g., value of fishing). But since local analyses can be complex, time-consuming and costly, an alternative economic approach called “benefit transfer” is frequently implemented.
A benefit transfer approach for an NbS would simply entail adapting the results from a site-specific analysis performed somewhere else to the context and conditions of the NbS of interest. Benefit transfer methods can be significantly lower cost but introduce higher uncertainties about the applicability of the valuation adapted from the other site. At present, there are several valuation standards (e.g., $ per habitat acre or $ per recreational day) that have been established by federal and some state agencies based on their review of academic literature and, in some cases, their own contracted analyses.
In addition, there are some standalone and integrated NbS-economic evaluation models, such as Integrated Valuation of Ecosystem Services and Tradeoffs (InVEST), which can be quite useful in modeling changes in ES. Some standalone models also enable monetization of ES outcomes with standardized values or lookup tables, but there are significant downsides to using those features. In particular, standardized models and databases rarely provide enough information to adapt existing monetary measures to the project context in terms of ecosystem characteristics or project scale. Further, because significant uncertainties can influence results, economic analyses performed outside of standalone models can enable the use of various forms of sensitivity analyses.
How are ES valued in project evaluations?
Economics incorporates the ES value in project evaluations in different ways depending on the availability of data. At a basic level, if economic data are not available to monetize ES, NbS can be compared to conventional designs in terms of its cost-effectiveness in generating ES. In some cases, ES improvements can be measured using multi-criteria-based indices established by biologists and ecologists, and lifecycle costs can be generated by engineers. Economists would use these inputs to generate a net present index-value of ES improvements per unit of cost. Where ES can be monetized, a benefit-cost analysis would be performed to combine the present value of monetized ES with other monetized outcomes and compare that with other designs on a value-for-money basis. Normally, because such ES analyses entail high levels of uncertainty in quantitative and monetized measures, sensitivity analyses are recommended.
What is an example valuation of ES?
Washington State partnered with HDR to analyze the value of ES as part of a broader flood damage reduction and aquatic species enhancement strategies for the Chehalis River Basin Project in Chehalis, WA. The purpose of this study was to evaluate project alternatives that reduce risk to life, property, and economy from flooding while enhancing habitat conditions in the river basin.
To analyze the potential positive or negative impacts of project alternatives, we evaluated how ecosystem restoration and enhancement measures generated benefits for aquatic habitats and fish productivity. To monetize the benefits of salmonid populations, our economists collaborated with habitat specialists and fishery biologists to estimate the biological impact of the project on increasing annual populations of Spring and Fall Chinook, Coho Salmon, and Steelhead Trout. Economic values for commercial and recreational activity were then applied using benefit transfer methods. In addition, we incorporated results from an officially recognized study by Washington State on the existence value of these species (e.g., the value to people who do not fish, but who value the species for its ecological presence). The total monetized value of improvements to the fishery combined separate valuations per fish for different user groups.
In this case, it’s important to recognize that the value of the habitat improvements was not monetized directly; instead, the contribution of the habitat improvements was estimated relative to how they enhanced fishery productivity, and then increases in fish populations were monetized in standard ways. Recognizing the uncertainties in how habitat improvements can contribute to fishery productivity, sensitivity analyses were performed to obtain a more complete perspective on a range of outcomes. The analysis of benefits from increased protection and enhancement of fish populations was then combined with the benefits of flood mitigation to reveal trade-offs in benefits and costs. The economic analysis informed Washington State that NbS solutions were an important dimension of the overall project design.
What are the best practices in valuing NbS?
The design and evaluation of NbS are best delivered from a multidisciplinary perspective, combining the skills of engineers, environmental specialists, economists, and strategic communications. We have learned through a variety of projects that NbS can be effectively incorporated into project alternatives, and their impacts can be effectively evaluated using new methods and data. The key principle is to communicate early and often during the project to ensure effective integration of expertise is incorporated. For instance, engineers are best able to frame the quantitative change in an ecosystem relative to a design; biologists and ecologists can inform the team on quantitative measures of changes in species or habitat function; and economists can establish frameworks and, potentially, monetary measures of ES to compare alternatives. Through this approach, stakeholders can make informed choices for NbS that balance functional objectives and cost-effectiveness.
