From WEPGN The Big Questions

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[edit] How can water’s contribution to the well-being of the Canadian economy, society and ecosystems be enhanced?

James Price Brock University

Whether from domestic consumption, irrigation, waste disposal, hydroelectric power, water-based recreation, wildlife habitat, or ecosystem regulation; we all benefit from the array of service flows provided by water resources. Enhancing these benefits is an immensely complex task. It involves managing the multiple aspects of a water resource (e.g. quantity, quality, and reliability) across diverse, often competing, service flows so as to improve societal well-being. This essay presents a framework for making such management decisions. The framework is based on the Total Economic Value (TEV) approach to ecosystem service classification and the concept of marginal value. The essay then discusses the current state of knowledge regarding the value of Canadian water resources and priority research directions.

TEV is one approach to classifying ecosystem services. It is widely used within the field of environmental economics, and has been employed in Statistics Canada and Environment Canada reports. Under the TEV, ecosystem services are subdivided into use values and non-use values (see Figure 1). Use values refer to the benefits derived from the active use of water resources. They are further partitioned into direct use, indirect use, and option values. Non-use values are independent of these uses and refer to the benefits derived from the preservation and existence of water resources. The TEV subcategories are defined as follows:

• Direct use values are the benefits received through the direct consumption of water resources (e.g. domestic activities, water-based recreation, aesthetics, and inputs into agricultural and manufacturing production).
• Indirect use values are the benefits received tangentially from water resources (e.g. hydroelectric power generation, waste disposal, wildlife habitat, and ecosystem regulating functions such as nutrient cycling).
• Option values, which are unrelated to current use, reflect the benefits received from ensuring water resources are available for future direct and indirect uses.
• Preservation values are the benefits received from bequeathing water resources to future generations.
• Existence values are the benefits received from the knowledge that a water resource exists, irrespective of its use by current or future generations.

The TEV taxonomy encompasses the full range of services that water resources provide to Canadian households, farms, and businesses. Subcategories, which progress from most (direct use values) to least (existence values) tangible, are independent of one another. This autonomy allows the benefits from various services to be compared and aggregated, so long as they are measured in a consistent fashion. Water’s total contribution to society is therefore the combined benefits from all its use and non-use service flows.

Figure 1: The Total Economic Value (TEV) Taxonomy

To enhance society’s well-being it is necessary to reallocate water resources towards services that provide the greatest benefit. To this end, economists have developed several methods for quantifying ecosystem services. These methods standardize benefits into monetary values that allow for comparison between different service flows. Although imperfect, these methods have proven to be reliable in their application, producing both credible and consistent values for many ecosystem services (Renzetti and Dupont, 2007). A detailed description of ecosystem valuation, including its theoretical underpinnings, is available in Freeman (2003).

Marginal values are commonly used when making such allocation decisions. In the present context, marginal values are the benefits associated with an incremental change in the quantity, quality, or reliability of a water resource. Economic theory suggests that society’s well-being will improve when its resources are allocated towards service flows that have relatively high marginal values, and away from those with relatively low values. To see this, consider the situation where water is either diverted for hydroelectric power generation or is left in situ, where it provides recreational and ecosystem-regulating benefits. If the value of diverting another unit of water to hydroelectricity exceeds the situ value, than that unit should be diverted. Alternatively, the unit of water should not be diverted if the value to hydroelectricity is less than the in situ value. More generally stated, water should be diverted so long as the marginal values associated with power generation exceed those provided by recreational and ecosystem-regulating services.

Estimates of water-resource values have been performed for Canadian households, farms, and businesses. A comprehensive list of estimates is available in Renzetti and Dupont (2007). For farms and business, research has focused on the benefits of water as an input to production. Recent estimates suggest values of $0.36 - $1.53/m3 for commercial and industrial applications and $0.003 - $1.46/m3 for crop production (Dupont and Renzetti, 2007). Variation in these values reflect differences in context, including water quality, water availability, and production processes. With respect to households, valuation studies have focused on improvements in drinking water quality and water-based recreation. Findings indicate annual values of $74 - $232 per household for improvements in tap-water quality (Renzetti and Dupont, 2007). Recreational values vary enormously depending on the activity under consideration and characteristics of the study site. In a recent study, Dupont (2003) finds annual values of $20, $44, and $76 per household to improve water quality in Hamilton Harbor for fishing, boating, and swimming, respectively. Indirect- and non-use values have received only limited attention. Within the Canadian context, studies have estimated values for the conservation and preservation of riparian habitats. Phillips et al. (1993), for example, evaluated the conservation and restoration of wetland habitat. They estimate annual values of $237 - $406 per household to improve 120,000 acres in Alberta. Pattison et al. (2011) find similar values to restore wetland habitat in Manitoba. Yu and Belcher (2011), Kulshreshtra and Gillies (1993), Ferguson et al. (1989) find smaller values, ranging between $33 and $78 per household, for wetland preservation.

Although offering insight into the relative benefits of ecosystem services, these values primarily highlight the dearth of information on water resource values. Filling these gaps, particularly with regards to indirect- and non-use values, is crucial to enhancing resource allocation. Estimating these values not only requires developments in economic valuation, but an improved understanding of water resource properties. Chief among these needs are improved water quality data and ground water mapping. Also needed are advances in understanding human-environment interactions, including the effects of land cover change, out-of-basin water transfers, and extreme weather events on ecosystem services. In these instances, intensive site-based studies would provide vital information regarding ecosystem vulnerability and threshold effects. This information, as well as those pertaining to water resources properties, are essential to designing valuation studies that produce accurate and useful estimates. Another research priority concerns the governance of water resources. In practice, water values are rarely used, even at the provincial level, to compare the benefits of alternative services flows. As a result, it is imperative to understand the decision processes, monitoring practices, resiliency, and effectiveness of regional and local institutions.

The TEV, coupled with the concept of marginal value, provides a well-defined framework for effective resource allocation. The application of this framework is hampered by a lack of estimated water values. Given these gaps in knowledge, it is difficult to predict how future research will affect the distribution of Canada’s water resources. Some insight, however, can be garnered from the few studies that have evaluated indirect and non-use benefits. The high value that Canadian households place on these benefits suggests that future water policy, should it be based on a marginal value approach to resource allocation, will place greater emphasis on protecting water for wildlife habitat, ecosystem regulation, and existence.

[edit] References:

1. Dupont, D. 2003. CVM Embedding Effects When There Are Active, Potentially Active, and Passive Users of Environmental Goods. Environmental and Resource Economics, 25, 319-341.
2. Ferguson, A., G. Holman, R. Kristritz. 1989. Wetlands Are Not Wastelands: Application of the Wetland Evaluation Method to the Cowichan Estuary, British Columbia. Sustainable Development Branch, Canadian Wildlife Service.
3. Freeman, A.M., III. 2003. The Measurement of Environmental and Resource Values: Theory and Methods. Second Edition. Resources for the Future, Washington, DC.
4. Kulshreshtra, S.N., J.A. Gillies. 1993. Economic Value of the South Saskatchewan River to the City of Saskatoon: Valuation Framework and Value of Selected Uses. Canadian Water Resources Journal, 18, 199-215.
5. Pattison, J., P.C. Boxall, W.L. Adamowicz. 2011. The Economic Benefits of Wetland Retention and Restoration in Manitoba. Canadian Journal of Agricultural Economics, 59, 223-244.
6. Phillips, W.E., T.J. Haney, W.L. Adamowicz. 1993. An Economic Analysis of Wildlife Habitat Preservation in Alberta. Canadian Journal of Agricultural Economics, 41, 411-418.
7. Renzetti, S., D. Dupont. 2007. The Economic Benefits of Water Use in Canada. Report prepared for the Canadian Water Network.
8. Yu, J., K. Belcher. 2011. An Economic Analysis of Landowner’s Willingness to Adopt Wetland and Riparian Conservation Management. Canadian Journal of Agricultural Economics, 59, 207-222.

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