Kiel Institute Highlights 2021

Wanted: Price list for services provided by nature

What is the cost of environmental destruction? Or, to put it another way, what is the value of nature’s services to humans? Finding a comprehensive answer to this question—going beyond individual cases of environmental damage—is the goal of a new DFG-funded research project on Kilimanjaro, to which a joint team from the Kiel Institute and Kiel University is contributing. The diverse ecosystems in a small area and the homogeneous population in terms of cultural and geopolitical influences make “the white mountain” in Tanzania an ideal research site. 

The ecological costs of human activities are not adequately accounted for in market prices.

One of the largest market failures of our time” (Stern and Stern, 2007) is caused by the fact that the effects of human activity on nature are not integrated into the algorithms of our market economy. Counteracting this market failure and developing a sustainable relationship between humans and nature is one of the greatest current global challenges, to which we aim to contribute with our project on “The role of nature for human well-being in the Kilimanjaro Social-Ecological System.”

In economic terms, external environmental impacts must be internalized. In any market economy, prices play a central role in coordinating supply and demand and thus help to achieve socially efficient allocations of resources. The comprehensive provision of information is a key function of prices—information about the cost of a good and likewise about the value that the provision of that good creates. On this basis, beneficiaries can decide whether they are able and willing to pay for the costs of provision.

An externality describes the (monetarily) unaccounted for effect of an action (such as the production and provision of a good) on an uninvolved third party. For example, a village upstream might consider building a dam in order to extend its fresh water supply. The village will have to pay for the building of the dam but these costs will not include concerns about the reduction in fresh water supply to the downstream village. This reduction is considered a negative externality of the dam project, which affects the downstream village. An externality can be positive or negative. In both cases, however, in the presence of externalities prices fail with regard to their information role and will induce inefficient over- or undersupply of goods and services. Hence, markets fail in that they are unable to produce socially efficient outcomes.

Natural environment missing from economic circular flow charts

While economics is defined as the science of the distribution of scarce resources, it emerged in a time in which natural resources appeared to be abundant compared to the global population and its needs at the time. The most common subjects of any distributional quarrel were land, labor, and capital. Its players, and thus the central actors in common circular flow charts created by economists, were households, firms, and the government (later also banks and potentially a foreign sector). Yet, as we come to stretch planetary boundaries and approach ecological crises of multiple kinds, the essential role of a safe natural environment to live in, healthy soils to grow food on, seasons that allow for sufficient drinking water, or a rich biodiversity to reduce the spread of diseases become strikingly palpable for human welfare. It is thus clear that the natural environment is an essential actor that has been excluded from the economic circular flow chart. Unaccounted for in market prices, the ecological costs of human activities become visible in environmental crises.

Internalizing environmental externalities corrects situations where market prices fail: internalization provides socially relevant information about the environmental costs and benefits of human activities. In our example, an internalization mechanism could be a law that requires the upstream village to make transfer payments to the downstream village that offset the losses from the reduction in fresh water from the river. Other options are possible but implementing an efficient correction of prices always requires a profound understanding of the human-nature relationship in general and the ecological costs/benefits induced by economic activities in particular.

Diverse ecosystems, geopolitically homogeneous population – ideal research conditions on Kilimanjaro

The project titled “The role of nature for human well-being in the Kilimanjaro Social-Ecological System” targets this knowledge gap by studying the role of nature for human well-being in a unique field setting at Kilimanjaro. The natural environment affects our lives in various ways, which in our context are referred to as Nature’s Contributions to People (NCPs). The human-nature interaction can be understood as a coupled social-ecological system (SES). While on the one hand nature influences human well-being through NCPs, human activities likewise shape the natural environment and thus NCP provision. In the KILI SES project, several colleagues from the natural and social sciences are collaborating to conduct a first attempt at studying this SES as a whole.

The Kilimanjaro area provides an ideal environment: there is a large variation of ecosystem types in a relatively small geographic area, in which variation in the cultural and geopolitical background of the population is minimal. Commonly, different ecosystem types that provide different NCPs are inhabited by people differing in culture or are subject to varying political systems. Both of these factors are likely to influence the interaction patterns of people and nature and also NCP valuation. As variation in cultural factors and the overarching political structure is minimized at Kilimanjaro, it makes it easier to identify the role of variation in NCPs for human well-being.

What value do humans assign to natural services and what influences that valuation?

In our part of the project, titled “Nature’s Contributions to People, economic preferences and human well-being,” we firstly aim to provide a quantification of people’s valuation of NCPs, making use of the detailed data on NCP supply provided by the natural scientists on the team. This data allows us to quantify valuation using the experienced utility approach of Life Satisfaction Analysis. Secondly, the plan is to go beyond the valuation level and study determinants of NCP valuation to gain a deeper understanding of heterogeneities in valuation levels between diff erent groups in society and to understand how factors related to societal evolution, such as an intensification of market access, influence the valuation of NCPs. Overall, it is hypothesized that NCPs play a vital role for human well-being but that there is strong heterogeneity in NCP valuation between people along the mediating variables collected.

In this project, we and the entire KILI SES team are following a novel unifying approach to study the complexities of the human-nature relationship. The role of a large number of NCPs will be assessed simultaneously through the lenses of natural, environmental, and social science. The first wave of large-scale data collections for this interdisciplinary field project is planned for summer 2022.

References:

Díaz, S., et al. (2015). The IPBES Conceptual Framework—Connecting Nature and People. Current Opinion in Environmental Sustainability 14: 1–16.

Raworth, K. (2017). Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist. Chelsea Green Publishing.

Rockström, J., et al. (2009). Planetary Boundaries: Exploring the Safe Operating Space for Humanity. Ecology and Society 14 (2): 32. URL: http://www.ecologyandsociety.org/vol14/iss2/art32/

Stern, N., und N.H. Stern (2007). The Economics of Climate Change: the Stern Review. Cambridge University press, p. 1.