Guidance manual on valuation and accounting of ecosystem services for SIDS, Executive Summary-Eng by United Nations Environment Programme

Guidance Manual on Valuation and Accounting of Ecosystem Services for Small Island Developing States (SIDS)

Executive Summary

United Nations Environment Programme

Copyright © United Nations Environment Programme, September 2014 ISBN: 978-92-807-3407-2 Job Number: DEP/1830/NA The Guidance Manual on Valuation and Accounting of Ecosystem Services for Small Island Developing States (SIDS) is an output of a joint initiative under UNEP entitled “Valuation and Accounting of Ecosystem Services of Small Island Developing States (SIDS): Operationalizing the Sustainability Path”. The Initiative is implemented by the Ecosystem Services Economics (ESE) Unit, the Marine and Coastal Ecosystems (MCE) Unit and Regional Seas Programme of the Division of Environmental Policy Implementation (DEPI), UNEP. The manual is developed as UNEP’s Ecosystem Services Economics Guidance Manual Series No. 2 under Valuation and Accounting of Natural Capital for Green Economy (VANTAGE) programme and Regional Seas Reports and Studies No. 193. We regret any errors or omissions that may have been unwittingly made. Any comments or corrections can be sent to publications@unep.org. Leaders of the initiative: Pushpam Kumar, UNEP/ESE Unit/DEPI and Takehiro Nakamura, UNEP/MCE Unit/DEPI Leading author: Paulo A.L.D. Nunes, WAVES, The World Bank Contributing authors: Andrea Ghermandi, University of Haifa; Laura Onofri, University of Padua Reviewers: Eric Mungatana, University of Pretoria; Harpinder Sandhu, Flinders University; Lalit Kumar, Delhi University; Mike Christie, Aberystwyth University; Luke Brander, Hong Kong University; Samia Sarkis, Government of Bermuda; Umiich Sengebau, Minister of National Resources, Environment & Tourism, Government of Palau; Isabel Torres de Noronha, Future Ocean Alliance (FOA) Editor of the summary: Elizabeth Kemf Acknowledgements: Sun Cho; Levis Kavagi; Anne Ogoti; Ruth Watulo; Janet Opati; Suzannah Goss Cover photo credit: © Lukas Kurtz/Lux Tonnerre, Flickr Design: Catherine Kimeu Printing: UNON Publishing Service Section, Nairobi, ISO 14001:2004-certified Disclaimer: The views expressed in this publication do not necessarily represent the decision or the stated policy of the United Nations Environment Programme. Also the designations employed and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of UNEP concerning the legal status of any country, territory or city or its authorities, or concerning the delimitation of its frontiers and boundaries. This publication may be reproduced in whole or in part and in any form for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgement of the source is made. UNEP would appreciate receiving a copy of any publication that uses this publication as a source. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the United Nations Environment Programme.

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Guidance Manual on Valuation and Accounting of Ecosystem Services for Small Island Developing States (SIDS)

Executive Summary

Contents Foreword............................................................................................................................................................iv Key messages .................................................................................................................................................... 1 1. Rationale and background............................................................................................................................ 6 2. Objectives.................................................................................................................................................... 7 3. End users of the guidance manual................................................................................................................ 7 4. Methodological approaches and materials used ........................................................................................... 8 5. Key lessons and conclusions ...................................................................................................................... 11

United Nations Environment Programme

Guidance Manual on Valuation and Accounting of Ecosystem Services for Small Island Developing States (SIDS)

Foreword The need to support the green economy transition of small island developing states (SIDS) in order to build their climate change resilience and propel their development forward – sustainably and inclusively – is increasingly being recognized by both SIDS and the international community. There is particularly strong interdependency between the natural environment and the economies of SIDS. For example, in the Federated States of Micronesia the contribution of fisheries to Gross Domestic Product amounts to 10 per cent. Exports are also largely supported by local ecosystems. Fifty-two per cent of the exports of the Caribbean island of Grenada are nutmeg, tuna, frozen albacore and cocoa beans. While in Trinidad and Tobago petroleum and natural gas represent 54 per cent of exports. The Guidance Manual on Valuation and Accounting of Ecosystem Services for Small Island Developing States reveals the degree to which these and many other SIDS depend on ecosystem services, and provides policymakers with a reliable approach for capturing and accounting for the contribution of ecosystem services to national economic growth and prosperity. One application that measures the impacts of ecosystem services on SIDS’ coastal tourism found that a 1 per cent increase in the number of coastal protected areas is associated with a 2.9 per cent increase in the arrival of international coastal tourists – almost double that of global estimates. The manual is filled with these and other findings that invite policymakers to see the protection of coastal areas and other natural assets as directly benefitting the economy. The importance of adopting suitable development policies designed to overcome the specific vulnerabilities of SIDS and rehabilitate their fragile ecosystems were emphasized by the international community in the Barbados Programme of Action (BPoA), the Mauritius Strategy for further Implementation of the BPoA, and the Johannesburg Plan of Action. This manual aims to enhance policymakers’ understanding of the standardised methodology for the valuation and accounting of island ecosystem services, taking into consideration the unique environmental, socio-economic and capacity issues relevant to SIDS. At UNEP, we aim to support the efforts of government and local communities, to overcome the vulnerabilities of SIDS by bringing the valuation and accounting of island ecosystem services into conventional decision-making frameworks of economic policies, and ultimately supporting SIDS policymakers’ ability to facilitate a green economy transition.

Achim Steiner UN-Under-Secretary-General and UNEP Executive Director

Executive Summary

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Key messages Valuation and accounting of island ecosystem services is fundamental to our ability to achieve sustainable, green growth in small island developing states (SIDS), also known as large ocean states.1 SIDS are characterized inter alia by (a) a well-defined set of in situ socio-economic-cultural and governance conditions; (b) a population’s clear perception and use of island ecosystem services; (c) high richness in natural capital; and (d) the delicate nature of the many ecosystems that support livelihoods and local economies. In this context, the Guidance Manual on Valuation and Accounting of Ecosystem Services for SIDS provides a methodological approach to “read” these conditions, and their respective implications, in terms of the selection, design and implementation of island ecosystem services valuation and accounting exercises. The process of ecosystem service valuation and accounting specifically for SIDS is fundamental to correct and tailor the use of the various techniques in this context. From a technical and methodological point of view, this guidance manual also informs policymakers that there is no simple solution with respect to the valuation and accounting of ecosystem services for SIDS. The choice of the economic valuation and accounting technique is ultimately anchored in the type of economic-policy and the category of island ecosystem services that it targets, i.e. provisioning, regulating or cultural service. This manual gives policymakers a ranking of the most suitable valuation techniques for application in the context of SIDS – including monetary valuation techniques such as market prices, production function, travel costs, hedonic pricing, cost-based, stated preferences and value transfer as well as ecological production function (non-monetary valuation technique). A survey of the ecosystem service valuation literature in SIDS revealed that less than a quarter of the studies reviewed were commissioned by governments or governmental agencies. Among these, market demand and supply approaches, including the production function technique, are shown to be the most frequently used. This can be interpreted as signalling the strong degree of suitability of this technique to meet policy and management questions in SIDS. Tables 1, 2, and 3 provide an overall synthesis of the valuation techniques’ applicability to SIDS (taking into account unique and relevant environmental, socio-economic and governance issues).

1 There are currently 32 small island developing States in three geographic regions: the Caribbean; the Pacific; and Africa, the Indian Ocean, the Mediterranean and the South China Sea (AIMS).

Guidance Manual on Valuation and Accounting of Ecosystem Services for Small Island Developing States (SIDS)

Table 1: Application of economic valuation techniques for provisioning services for SIDS Economic Value Category

Beneficiaries/Contribution to SIDS

Food and raw material

National-Regional/Very strong

Most suitable valuation techniques in SIDS

NA NA NA NA Natural habitats

National-Global/Strong

NA NA NA NA NA

Genetic, ornamental and medicinal resources

National-Regional/Medium- strong NA NA NA NA

Notes: Market Prices (MP); Production Function (PF); Travel Cost (TC); Hedonic Pricing (HP); Cost-based (CB); Stated Preferences (SP); Value Transfer (VT); Ecological Production Function (EPF); The degree of spatial distribution of the beneficiaries: ‘local’, ‘national’, ‘regional’ and ‘global’; The role of ecosystem services in terms of its contribution to the human well-being of the communities based in SIDS, with a particular focus on subsistence-based communities: ‘minimum’, ‘medium-strong’, ‘strong’, and ‘very strong’. The extent of spatial distribution of beneficiaries in the context of SIDS is: quality assessment scale, ranging from a minimum, denoted by ‘oooo’ to a maximum, denoted by ‘••••’. NA indicates the valuation technique under consideration is ‘not applicable’ in SIDS.

Photo Credit: © yeowatzup, Flickr

Executive Summary

Table 2: Application of economic valuation techniques for regulating services for SIDS Economic Value Category

Beneficiaries/Contribution to SIDS

Most suitable valuation techniques in SIDS

Gas regulation, including carbon

Global/Very strong

NA NA NA NA

Climate regulation

Global/Strong

NA NA NA NA

Coastal protection

Local-National/Very strong

NA NA

Water supply and regulation

Local/Very strong NA

Soil formation, nutrient and waste regulation

Local/Very strong

NA NA

Pollination and biological regulation

Local - National/Strong

NA NA NA NA NA

Market Prices Production Function Travel Cost Hedonic Pricing Cost-based Stated Preferences Value Transfer Ecological Production Function Market Prices Production Function Travel Cost Hedonic Pricing Cost-based Stated Preferences Value Transfer Ecological Production Function Market Prices Production Function Travel Cost Hedonic Pricing Cost-based Stated Preferences Value Transfer Ecological Production Function Market Prices Production Function Travel Cost Hedonic Pricing Cost-based Stated Preferences Value Transfer Ecological Production Function Market Prices Production Function Travel Cost Hedonic Pricing Cost-based Stated Preferences Value Transfer Ecological Production Function Market Prices Production Function Travel Cost Hedonic Pricing Cost-based Stated Preferences Value Transfer Ecological Production Function

Guidance Manual on Valuation and Accounting of Ecosystem Services for Small Island Developing States (SIDS)

Table 3: Applicability of the techniques for cultural services valuation in SIDS Economic Value Category

Beneficiaries/Contribution to SIDS

Most suitable valuation techniques in SIDS

Recreational

Local/Very strong

NA NA NA

Tourism, including ecotourism

National /Very strong NA NA NA

Legacy, spiritual and historical

Local-National/Medium- strong

NA NA NA NA NA NA

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The key methodological recommendations of this manual are presented with illustrative applications of valuation and accounting of island ecosystem services, through a comprehensive, step-bystep guide. The context of SIDS within which the valuation and accounting of island ecosystem services is undertaken, potentially affects every stage of the process: from the prioritization of the ecosystem services to be valued to the identification of the beneficiaries, and the validity of policy prescriptions and economic incentives.

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A step-by-step practical guide has been tested for island ecosystem service valuation and applied to monetary valuation techniques such as market prices, production functions, travel costs, hedonic pricing, cost-based, stated preferences, and value transfer; these have been adequately tailored to SIDS. A step-bystep guide for island ecosystem service accounts has also been developed to build experimental natural capital accounts for ecosystems and to create monetary ecosystem service accounts.

•

This guide enables the provision of all the specific information that is needed for improving SIDS' policy makers’ understanding of the use of valuation and accounting techniques in decision-making, therefore bringing island ecosystem services to conventional decision-making frameworks of fiscal, monetary and industrial policies, and ultimately backing up policymakers' ability to achieve sustainable green growth.

•

From an economic-policy point of view, valuation and accounting of island ecosystem services can improve cost-benefit analysis and policy appraisal in SIDS. This information may support policy decisions regarding the level of investment in built infrastructure or capital (e.g. the expansion of a harbour for cruise liners) or/ and investments in nature infrastructure or capital (e.g. the creation of a marine protected area). In these cases, valuation of island ecosystem services is fundamental to shedding light on how much to invest, whilst managing natural resources efficiently and sustainably. This manual supports policymakers' ability to value island ecosystem services in cost-benefit analysis and policy appraisal in SIDS.

Executive Summary

•

Valuation and accounting of ecosystem services plays a key role in the formulation of Payment for Ecosystem Services (PES) schemes in SIDS. This manual provides technical guidance on how to design and structure a PES scheme for SIDS. The Green Fee in Palau, which incorporates economic valuation of island ecosystem services, is an example of such scheme.

•

Valuation and accounting of island ecosystem services is also fundamental for their integration into SIDS' Systems of National Accounts (SNAs). Information regarding the contribution of ecosystem services, such as carbon storage, coastal protection and flood mitigation, is often missing from or invisible to national GDP. In coordination with the principles of the United National Statistical Commission, through its System of Environment and Economy Accounts (SEEA), this guidance manual fills this gap by supporting policy makers’ abilities to produce data about a small island developing state's natural capital with respect to the environment and ecosystem services. In this way, it assists policymakers to develop better indicators for monitoring sustainable development and long-term economic growth. In addition, environmental and island ecosystem service accounting informs policymakers on how the poorest households use and depend heavily on natural capital.

•

Finally, valuation and accounting of island ecosystem services produces information that can be used to fine-tune fiscal policies by changing the final market prices of some goods and services. This manual aids policymakers in revealing the dependency of their countries' economic sectors on island ecosystem services. Consequently, it can assist policymakers in designing schemes for taxes and subsidies aligned with the sustainable use of critical natural resources.

Guidance Manual on Valuation and Accounting of Ecosystem Services for Small Island Developing States (SIDS)

1. Rationale and background The rationale and background of this manual is linked to the preparation of the Third International Conference on SIDS, which takes place in Samoa, September 2014. It is also closely related to a wide set of international initiatives, including The Economics of Ecosystems and Biodiversity (TEEB). TEEB is a global initiative focused on attracting attention to the economic benefits of biodiversity including the growing cost of biodiversity loss and ecosystem degradation. TEEB presents an approach that can help decision-makers recognize, demonstrate and capture the values of ecosystem services and biodiversity. TEEB’s wide range of national assessments, which were carried out with greater vigour and confidence, clearly show the relationship between changing ecosystems and their impacts on people, especially the poor. Since the results from the TEEB report series were presented at the Conference of the Parties of the Convention on Biological Diversity (CBD) in 2010, a considerable number of additional countries have initiated TEEB studies with an aim to demonstrate the values of nature and to encourage policymaking that recognizes the values of ecosystem services and biodiversity. TEEB’s outcomes and recommendations have paved the way for the creation of the Intergovernmental Platform on Biodiversity and Ecosystem Services (IPBES), which aims to assess the condition of the world’s ecosystems, synthesize knowledge on the issue to be used by policymakers, and develop capacity to assess and use scientific information for better decisions leading to enhanced human well-being. Similarly, this manual is also linked to the UNEP-led Inclusive Wealth Index (IWI), which emphasizes the need to estimate wealth of all types including natural capital in order to promote the sustainability of economy and society. It is also closely related to the UN-led System of Environmental-Economic Accounting (SEEA) and Central Framework and Experimental Ecosystem Accounting. The latter takes the System of National Accounts (SNA) to its logical culmination where statistics recognize the need for environmental indicators to better capture the global and national sustainability discourse. In addition, the World Bank’s Wealth Accounting and the Valuation of Ecosystem Services (WAVES) partnership also backs up countries that want to implement natural capital accounting. This manual aims to enrich and compliment the above-mentioned background initiatives by bringing the discussion and operationalization of valuation and accounting techniques of island ecosystem services into the context of SIDS, improving SIDS policymakers’ understanding of the use of valuation and accounting techniques in decision-making. In this way, the manual should help bring island ecosystem services to conventional decision-making frameworks of economic policies and ultimately support SIDS policymakers’ ability to achieve sustainable, green growth.

Executive Summary

Photo Credit: ÂŠ Aaron Vuola, UNEP

2. Objectives The primary objective of the manual is to provide an illustration and selected applications of qualitative and quantitative methodologies for the economic valuation and accounting of ecosystem services in SIDS. The manual also describes and discusses, with selected applications, the set of valuation methodologies that can assist policymakers in mainstreaming the valuation of island ecosystem services into general macro-economic development policies as well as integrating island ecosystem services with equity and distributional issues. It also provides indications on how these can be tailored to the specific environmental and socioeconomic conditions in SIDS. Specific objectives of the manual include provision of: a non-technical introduction to the criticality of applying valuation and accounting of ecosystem services in the context of SIDS, including strengths and limitations; illustrative applications of standardized methodology for the valuation and accounting of island ecosystem services, through a step-by-step guide; an overview of the available resources for conducting valuation and accounting of ecosystem services in SIDS; and demonstration of the application through case studies with specific focus on the management of island ecosystems in SIDS.

3. End users of the guidance manual This manual is mainly directed to policymakers, ranging from governments to national economic planning agencies. In addition, the manual will be of use to development practitioners as well as the wider community with responsibilities in the national management of natural resources in SIDS. Policymakers are concerned about valuation and accounting of ecosystem services because they need to know the contribution of SIDSâ&#x20AC;&#x2122; natural environment and their island ecosystem services to national GDP and the main economic sectors, including tourism, fisheries and mining. Policymakers seek quantitative information that expresses and translates the contribution of island ecosystem services on GDP, and ultimately the contribution of island ecosystem services on the welfare of SIDS communities. Preference is therefore given in translating island ecosystem services values in monetary terms. This way, policymakers can compare direct contribution of island ecosystem services to national income as well to selected economic sector revenues. This manual provides an understanding of the standardized (monetary) methodologies for implementing valuation and accounting of island ecosystem services, taking into consideration the unique environmental, socio-economic and capacity issues relevant to SIDS.

Guidance Manual on Valuation and Accounting of Ecosystem Services for Small Island Developing States (SIDS)

4. Methodological approaches and materials used This manual introduces three critical methodological issues that have to be taken into consideration when addressing the economic valuation and accounting of ecosystem services for SIDS. The first issue sketches the theoretical background that inspire economic valuation and accounting of ecosystem services, by showing the strong interrelation between economic theory and related economic valuation methodologies. Economic valuation is an empirical exercise strongly rooted in economic theory. The second issue refers to the need to “tailor” the economic valuation and accounting methodologies to the context of SIDS. The main point here is to make clear that the specific environmental, socio-economic and capacity issues relevant to the context of SIDS are brought for discussion in the application of “standard” economic valuation methods. Such a methodological adaptation and tailoring is crucial for guaranteeing the success of the valuation and accounting exercise as well as for the overall statistical validity of the values and their legitimacy in supporting policy action. The final issue refers to the strong multidisciplinary nature of ecosystem services valuation and accounting, by encouraging the collaboration of environmental scientists in the fine-tuning of the valuation. Furthermore, the proposed multi-disciplinary work needs to be clearly articulated with policymakers, who often express a demand for synthesis on valuation, accounting and mainstreaming of ecosystem services into conventional decision-making frameworks of fiscal, industrial and monetary policies. The manual also complements the state-of-the-art of methodological framework by extending the economic valuation of ecosystem services to accounting. In fact, the manual also aims to define a step-bystep guide that is a scientifically credible as a proposed methodology of accounting of ecosystem services for SIDS with illustrative applications. This step-by-step guide goes hand-in-hand with the recent adoption of the System of Environment and Economy Accounts (SEEA) and with wide acceptance of the need to put natural capital accounting into policy action. This institutional-driven demand is also extended to ecosystem services accounting. There is, however, no agreed international standard on how to measure and account for ecosystem services. As a result, there is renewed momentum with ministries of finance and ministries environment that support experimental work on ecosystem services accounting as this can be used to back decisions on the most effective management of ecosystem services in supporting individual and societal well-being. In this setting, the manual presents a step-by-step guide for building experimental physical ecosystem natural capital accounts, with a case-study application in Mauritius, and a step-by-step guide for building monetary ecosystem services accounts, with an application in Madagascar.2 The proposed guidelines for building physical ecosystem services accounts in Mauritius are characterized by the use and the processing of multiple datasets and their assimilation into a geographical grid, relying on GIS tools and high-resolution land cover maps from satellite images. A first account is established for land cover stocks and

2 Although Madagascar is not under SIDS, the application provides a solid illustration of the proposed methodology in an institutional context that is similar to that of many developing countries, including SIDS.

Executive Summary

change; it covers the inland territory as well as the coastal waters, whose bottom can be mapped (i.e. lagoons and coral reefs). This land cover account is the data infrastructure upon which accounts of biomass-biocarbon, water and the ecological infrastructure and biodiversity (including species) accounts are developed. These three accounts start with basic balances of stocks and flows; next, the resource that is really accessible (and its use) is estimated. Furthermore, the step-by-step guide also presents and maps the ecosystem capital account of coastal seas. Finally, as a proof of concept, the calculation of ecosystem capability in a composite currency, Ecosystem Capability Unit (ECU), is attempted. Again, at this stage, the experimental character of the project and the provisional status of data must be emphasized. The second case study is based on the piloting work on natural capital accounting in Madagascar, coordinated under the WAVES umbrella. In particular, the step-by-step guide was applied to account for the monetary value of ecosystem-freshwater in a Malagasy forest area and the Ankeniheny-Zahamena Corridor (CAZ). In CAZ, ecosystemwater is used as a production input to three economic activities: (1) mining; (2) agriculture; and (3) ecotourism. The proposed experimental step-by-step guide on monetary ecosystem-water account is a microeconomic funded procedure and it respects the principles of the SNA. The approach starts from the marginal contribution of the ecosystem services, i.e. ecosystem-freshwater, on the production activity. Using production functions, the marginal impact of water on total outputs in the different sectors is estimated. Following microeconomic theory, a monetary value to the marginal impact of ecosystem-water in the different sectors is computed. Finally, the total market value produced with the selected ecosystem services is calculated and ready to be transferred to national account sheets. The manual also reviews the current initiatives and working groups with a focus on ecosystem services valuation and accounting in SIDS, including database repositories, such as the Environmental Valuation Reference Inventory (EVRI), the TEEB Ecosystem Services Valuation Database and the Marine Ecosystem Services Partnership Library. All these economic valuation repositories, however, do not focus much attention on the economic valuation of ecosystem services in SIDS. Furthermore, most of the existing economic data are not linked to a policy process and therefore do not have the objective of assisting policymakers. In addition, the manual also lists all relevant international platforms operating with/from SIDS in the areas of environmental conservation and management or with a specific linkage with the valuation and accounting of ecosystem services, including WAVES. Many regional working groups contribute with a rich communication, collaboration and exchange of data on island ecosystem services and research experience among SIDS. This manual also highlights the need to orient all these initiatives in the perspective of economic valuation and accounting and how to bring these for policy design. As a follow up, this manual discusses how SIDS may develop their potential in creating policy-oriented valuation datasets of island ecosystem services by reflecting the specific priorities of SIDS. SIDS have the potential to become worldwide leaders in the area of natural capital and ecosystem accounting if this work is done in coordination with the partners, and principles, supporting the implementation of SEEA. The manual presents selected case studies on valuation of island ecosystem services and discusses the estimation results in a policy perspective. This highlights the fact that valuation and accounting of ecosystem services in SIDS is not seen here as a technical exercise, but as a means to convey information for policymakers, to support policymakers’ ability to design economic policy actions and to ultimately achieve sustainable, green growth for the SIDS. As an illustrative example of application in SIDS, one can consider the application of the travel cost technique in Puerto Rico. The valuation exercise focuses on the benefits experienced by domestic visitors from the Caribbean National Forest in Puerto Rico regarding cultural services (Step 1 and 2: Specify the change in the quantity of the product or service and identify the ecosystem services and populations affected by the policy). An on-site survey was performed and collected data from 11 different sites (Loomis et al 2007)3. Data were collected regarding demographic information of the users, distance and time travelled, and characteristics of the visited sites (Step 3 and 4: Survey visitors to collect information about the costs of the visit, motives for the trip, frequency of visits, site attributes and socio-economic variables such as the tourist’s place of origin, income, age and education and calculate the average travel cost for recreational visitors using the round-trip travel distance, and the cost and

3 Loomis, J.B., Gonzalez, J.M. and Gonzalez-Caban, A. (2007). «Spatial Limits of the TCM Revisited: Island Effects», Selected paper prepared for presentation at the Western Agricultural Economics Association Annual Meeting, Portland, Oregon.

Guidance Manual on Valuation and Accounting of Ecosystem Services for Small Island Developing States (SIDS)

travel times). A negative binomial distribution corrected for on-site sampling bias was used to analyse the collected data. Robust standard errors were calculated for each model coefficient. Responses where the visit to the site was not the main purpose of the visit were discarded (Step 5: Estimate the demand for visiting the site using statistical analysis and the data collected). The travel cost method yielded a net willingness-to-pay per trip of US$17 for the corrected model and US$29 for the uncorrected version (Step 6: Estimate the total economic benefit of the site to visitors). Analysts found a large discrepancy when comparing these to the results of the contingent valuation exercise (US$109 per trip), which can be attributed to the geographic limits of the Commonwealth of Puerto Rico. This study, therefore, highlights the problems arising from the assumption of a continuous spatial market in the travel cost model, when applied to islands or other isolated areas, by comparing the consumer surplus per person per trip obtained, by analysing the travel costs and the means of a contingent valuation exercise. Another illustration refers to the proposed experimental step-by-step guide on a monetary ecosystemwater account. The step-by-step guide starts from the empirical estimation of the marginal productivity of the freshwater-ecosystem services/input, in the production of selected market goods, and finishes in recording that value in monetary terms for national accounts. Such condensed information can be of high relevance to the policymaker. Valuation results show that the production of cobalt, for instance, presents diminishing returns. This is a technical expression that indicates that a small increase of ecosystem-freshwater corresponds to a less than proportional increase in the production of cobalt. The production is therefore not technically efficient, and the more cobalt the firm wants to produce, the more (than proportional) amount of freshwater the firm has to use. The ecosystem balance might be hampered by an excessive exploitation of freshwater for the production of cobalt. The use of freshwater in agriculture/rice, on the contrary, is more efficient. However, in monetary terms, the market of cobalt is much more profitable than the market of rice. The trade-off between ecosystem service conservation and economic profitability that the policymaker has to face is clearly measured and accounted. The policymaker will select according to the agenda and preferred criterion. However, valuation and accounting of ecosystem services becomes a necessary pre-requisite for choice and trade-offs balancing. A final case study refers to the discussion of values that measure ecosystem services impacts on coastal tourism in SIDS. Ecosystem services are drivers of touristic attraction in SIDS. The effect of ecosystem services on tourists’ arrivals can be measured in order to inform policymakers on the contribution of this natural resource to the development of coastal tourism markets. For example, estimation results show that the (marginal) impact of the coastal protected areas on the number of international arrivals is estimated at 2.90 for SIDS. Based on these regression results, a one per cent increase in the number of coastal protected areas is associated with a 2.90 per cent increase in arrivals of international coastal tourists. The empirical results show that international tourists have a strong preference for SIDS’s coastal habitat abundance and marine biodiversity and therefore provide an important indication for tourism policies. This means that the policymaker can look at the ecosystem services-based “coastal protected area” as an attraction factor in the international tourism market. This statement becomes even stronger when we compare the SIDS estimates with the global estimates; in fact, the global study, the estimated coefficient for “coastal protected areas” equals 1.44 (Onofri and Nunes 2013).4 Therefore, in SIDS the conservation and protection of coastal areas can also be interpreted as a good investment for attracting international tourists. In this context, one could suggest to finance the management and conservation of this marine natural capital by exploring the use of market-based instruments. This can occur in different ways. Policymakers can design and apply a “green tax - payment for ecosystem services” (i.e. airport arrivals and hotel taxes) that international tourists pay as a contribution for supporting national management and conservation programmes and initiatives. This “green tax” is both incentive compatible (the tourist is willing to contribute for a good that enters its preference structure and is consumed; while the policy-maker receives the payment) and economically viable (the estimated coefficient for total expenditures has a larger magnitude and is more statistically significant for international tourists). These economic valuation results fully support the Green Fee presented in Palau. Finally, the manual also uses studies involving emerging markets in SIDS, like the biotechnology markets where selected island ecosystem services are crucial production factors, and discusses its insights in terms of policy instruments and the development of this emerging sector.

4 Onofri, L. and Nunes, P.A.L.D. (2013). “Some Like it Green: Tourism Demand and Marine Biodiversity: a Worldwide Analysis”, Ecological Economics, vol. 88, p.p. 49-56.

Executive Summary

5. Key lessons and conclusions A number of key lessons and conclusions can be drawn from this manual: Economic valuation and accounting of ecosystem services must be grounded on economic theory and tailored to the specific features of the site where the valuation is performed; the manual presents to policymakers a step-by-step guide that has been tailored to SIDS context and therefore is able to provide all the adequate, specific information that is needed for improving SIDS policymakers’ understanding of the use and the significance of valuation and accounting techniques in decision-making. Economic valuation and accounting of ecosystem services is a multidisciplinary exercise, involving the work of economists, natural scientists and statisticians, but it also needs to be rock-solid and linked to the SIDS policy making context, including addressing the demand of policymakers for synthesis on valuation and accounting, mainstreaming island ecosystem services to conventional economic decision-making frameworks, and ultimately supporting policymakers’ ability to achieve sustainable, green growth. From a methodological viewpoint, the economic valuation of island ecosystem services is anchored in welfare economics and looks at the identification and monetization of all the benefits that island ecosystem services produce on human welfare. Island ecosystem services produce market and non-market benefits on human welfare. The latter are not captured in the existing markets and national production. For this reason, there is a toolbox of valuation techniques that allow us to identify and capture the economic value of island ecosystem services. This manual provides a step-by-step valuation Guide of island ecosystem services that is adapted to SIDS context, which is also fully supported by on economic theory and is able to directly address the demand of policymakers for island ecosystem services valuation synthesis and mainstreaming these services into macro-economic policy design.

The review of worldwide data repositories on economic valuation of ecosystem services informs us that most of the studies and economic values are not specific to SIDS or to island ecosystem services. Furthermore, less than a quarter of the studies reviewed were commissioned by a national government or governmental agency. In other words, less than a quarter of the studies reviewed were explicitly carried out with the objective of feeding policy formulation. In this context, one of the conclusions of this manual is that there is a need for building a SIDS-facilitated global partnership. This could support and pilot valuation and accounting of island ecosystem services with the main objective to bring and mainstream island ecosystem services values to macro-economic policy making and thus support policymakers’ ability to achieve sustainable, green growth in SIDS or large ocean states.

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From a methodological viewpoint, the rationale for accounting of island ecosystem services is embedded in the notion of exchange value and is ultimately linked to existing markets and national production. The contributory value of island ecosystem services to a national economy, however, is often invisible in the current system of measurement of national production. Therefore, it is necessary to immediately disentangle and measure the magnitude of such a contribution from the existing market price and value information. This manual provides a distinct step-by-step accounting guide to recognize and factor out the contribution of selected island ecosystem services on national production that is consistent with the principles of the System of National Accounts.

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