Available online at www.sciencedirect.
com
The economics of ecosystem services: from local analysis to
national policies
Pushpam Kumar1, Eduardo Brondizio2, Franz Gatzweiler3, John Gowdy4,
Dolf de Groot5, Unai Pascual6, Belinda Reyers7 and Pavan Sukhdev8
The paper builds around the key messages from the recently
completed study — The Economics of Ecosystems and
Biodiversity (TEEB). The paper essentially attempts to map the
problem encountered in up scaling the findings from site/local
scale to national scale. First, the rationale for economic analysis of
ecosystem services has been discussed and then the challenges
in applying economics to ecosystems and biodiversity have been
identified. The paper discusses the role of economic valuation,
discounting and necessary indicator for it. Social and cultural
context of economic valuation along with the nature of value
articulating institutions have been highlighted. Most of these
issues typically deal with ecosystem services at site and project
level. The paper lays down the need for arriving at national policies
from microlevel valuation work. The paper suggests that for
national policy formulation and design, valuation and accounting
of ecosystem services must be seen in the economy wide context
where interdependence of sectors is the key. The paper shows
the existing hiatus between this level of analysis of economics of
ecosystems and the need for credible national level policies. An
attempt has been made to highlight necessary steps to arrive at
national level policies on ecosystems management.
Addresses
1
Division of Environmental Policy Implementation, United Nations
Environment Programme (UNEP), Nairobi, Kenya
2
Indiana University, USA
3
ZEF, University of Bonn, Germany
4
Rensselaer Polytechnic Institute, New York, USA
5
Environmental Systems Analysis Group, Wageningen University, The
Netherlands
6
7
Cambridge University, United Kingdom
CSIR, South Africa
8
GIST Advisory Services, India
Corresponding author: Kumar, Pushpam (pushpam.kumar@unep.org)
Current Opinion in Environmental Sustainability 2013, 5:78–86
This review comes from a themed issue on Terrestrial systems
Edited by Bojie Fu, Martin Forsius and Jian Liu
For a complete overview see the Issue and the Editorial
Received 24 August 2012; Accepted 7 February 2013
Available online 14th March 2013
1877-3435/$ – see front matter, # 2013 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.cosust.2013.02.001
Background
Though policy makers and society in general have gained
awareness of the economic value of ecosystems and
Current Opinion in Environmental Sustainability 2013, 5:78–86
ecosystem services since the publication of the Brundt-
land Report as Our Common Future in 1987 and other
works such as by Daily [1]. Governments and policy
makers however have been rather reluctant to embrace
the underlying message that by ignoring the economic
importance of our ‘natural capital’ we are living at the
expense of the poor and of future generations. During
2001–2005, a comprehensive assessment of the world’s
ecosystems – the Millennium Ecosystem Assessment
(MA) provided credible information on the state and
condition of the world’s ecosystems. The biggest ever
scientific assessment concluded that there has been
decline in the sixty percent of the services over 1960–
2000 [2,3]. In March 2007, in the meeting of the G8+5
Environment Ministers in Potsdam, Germany, it was
proposed that a global study on ‘the economic signifi-
cance of the global loss of biological diversity’ should be
undertaken as part of a ‘Potsdam Initiative’ for biodiver-
sity. One of the major objectives of this global study,
which was entitled, ‘The Economics of Ecosystems and
Biodiversity’ (TEEB), was to assess current approaches
for using ecological sciences and economics for informed
choices and decision making. On the one hand, TEEB
intended to better inform conventional economic policy
about its impacts on ecosystem health and biodiversity,
on the other, it suggested ways to mainstream the valua-
tion of ecosystem services into national and local planning
and policies as well as business assessments of their
economic impacts and dependencies on biodiversity.
This article presents a synthesis of recommendations
and challenges associated with the economic valuation
of ecosystems and biodiversity learned as part of the
TEEB process [4]
An assessment of the peer review literature of the last 30
years (1980–2010) under TEEB emphasized a growing
need for collaboration between ecologists and economists
to have a coherent perspective on the trade-offs reflected
in individual and societal choices [5,6,7]. The TEEB
process, however, suggested that a further step is needed
to integrate a broader array of social sciences facilitating
the crossfertilization of disciplines to design an accepta-
ble solution. For example, economic valuation of ecosys-
tem services requires a pluralistic methodological
framework combined with the explicit recognition of
prevailing institutions and governance structures working
in different contexts. Even if the outlooks of disciplinary
traditions differ, the scale of the problem requires that
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 The economics of ecosystem services: from local analysis to national policies Kumar et al. 79
solutions can only emerge in making the methodology
more transparent and fluid in order to appreciate each
other’s take on the problem [8]. Raising new set of
questions and linking social and biophysical sciences
appear to be of paramount importance [9,10]. An
assessment of emerging and existing literature on
economics of ecosystems and biodiversity clearly sup-
ports the need for an integrative science of sustainability.
The paper is organized around the central question of how
to upscale the findings from local level economic assess-
ment to a level which concomitant to national level policy
formulation. The paper essentially builds around the major
findings emerging from the TEEB and has been organized
into sections. Section ‘Need of transdisciplinarity in
economic assessment of ecosystem services and biodiver-
sity’ discusses the nature of economic assessment and how
the trans-disciplinarity plays a critical role in such assess-
ments. Section ‘Indicators and issues in discounting’ dis-
cusses one of the critical elements in ecosystem
assessment-indicators. This section also brings the
relevance of choice of discounting which is corner stone
to any economic assessment where intertemporal choice is
inevitable. Section ‘Valuation methods and nonlinear
changes in ecosystems’ addresses the role and relevance
of valuation and suggests the challenges in capturing some
of the services especially when they are regulating and
cultural in nature with nonlinear changes induced by
various types of drivers. Section ‘The need to integrate
micro economic analysis into macroeconomic approach to
design response policies at national level’ clearly provides
rationale to integrate site specific micro economic analysis
especially on valuation into macroeconomic approach to
design response policies at national level. Finally, under
Section ‘Aligning microeconomic findings with macroeco-
nomic policies’, the paper concludes with the recommen-
dation on the need to align the microeconomic findings
with the macroeconomic priorities.
Need of transdisciplinarity in economic
assessment of ecosystem services and
biodiversity
In the context of economic assessment of ecosystem
services, the role of multi disciplinarity and transdiscipli-
narity is not new. While multidisciplinary approach
embraces the approaches of various social and bio-
physical sciences, transdiciplinary approach essentially
emphasizes the need of learning and reinforcing the
methodology of disciplines in hierarchy of learning and
knowledge systems [11]. Linking biophysical aspects of
ecosystems with human benefits through the notion of
ecosystem services is essential to assess the trade-offs
involved in the loss of ecosystems and biodiversity in a
clear and consistent manner. Despite reservations
brought up by some authors [12] regarding the commo-
ditization of nature, the losses from not taking better
account of the economic values of nature are more
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threatening than the damage possibly done attaching a
value to ecosystem services which can be perceived as
invaluable. Although representing a balancing act be-
tween imposing an economic perspective and respecting
cultural differences in the way people relate to nature,
economic valuation can work as a feedback mechanism
for a society that derives its resources from the environ-
ment but has distanced itself from the consequences of its
actions. In other words, economic valuation can help
communicate the value of nature to different people
using a language that speaks to dominant economic
and political views around the world.
Economic assessment in general, should be spatially and
temporally explicit at scales meaningful for policy for-
mulation or interventions, inherently acknowledging that
both ecological functioning and economic values are
contextual, anthropocentric, and time specific. It is also
important that economic assessments of ecosystems help
to uncover the service delivery in biophysical terms, to
provide ecological underpinning to the economic valua-
tion or measurement. Assessments including alternative
scenarios of action, and analysis of risks and uncertainties,
can be instrumental in showing trade-offs between
alternative uses of ecosystems, and the total bundle of
ecosystem services provided by different conversion and
management options.
Understanding the economics of ecosystems and biodi-
versity can inform decisions about what and how much to
conserve in a world of conflicting choices and competing
demands for resources. Credible and transparent valua-
tions of ecosystem services are useful in this context [13].
While most of the economic approaches to ecosystems
and biodiversity are rooted in microeconomic analysis, the
need for policy design at the national and regional level
requires integration and intelligent up scaling of micro-
findings. Interdisciplinary evaluation exercises can help
indicate how indirect drivers affect the flow of services
from forests, wetlands, marine and other ecosystems at
different levels. Effective and efficient response policies
to environmental degradation require economy wide
intersectoral analysis of feedback effects of individual
policies for management of ecosystems. In order to avoid
the mistakes associated with panaceas-types of policies
[14], national and regional level policy formulations for
sustainable management of ecosystems and biodiversity
need to offer macroeconomic frameworks for ecosystem
accounting which are, however, flexible enough to
account for inter-regional differences. Examples abound
where a seemingly unrelated change in macropolicy, for
example, a change in exchange rate, impact differently
the health of ecosystems in diverse regions and used by
diverse social groups [15]. A specific macropolicy like
agricultural subsidies has caused direct degradation of
whole ecosystems [4]. Valuation tools can be particularly
helpful in evaluating, predicting, and ranking policy
Current Opinion in Environmental Sustainability 2013, 5:78–86
80 Terrestrial systems
outcomes of alternative macroeconomic scenarios. How-
ever, it requires attention to fundamental issues playing out
at subregional and local levels, such as why people value
nature in a particular way, the reliability of valuation criteria
and so on [16,17]. For this reason, questions of criteria
for valuation thus require contributions from a broad array
of social and behavioral sciences. In other words, because of
the multidimensional and socio-cultural embeddedness of
value, any exercise of valuation is relative to a given
individual or group of people. In that context the question
of how to value ecosystem services and biodiversity and the
choice of a valuation method are as challenging as the
attempt to attach a particular value to them. While macro-
economic approaches can provide the backbone for analyz-
ing the value of ecosystems services and biodiversity to the
larger society, microeconomic perspectives are necessary to
account for local particularities.
Economic assessments of ecosystems should be set
within the context of alternate scenarios — recognizing
that both the values of ecosystem services and the costs of
actions can be best measured as a function of changes
between alternative options. Comparing the outputs
under several scenarios will inform decision makers of
the gains and losses of alternative possible futures and
different associated policy packages. The importance of
using scenarios in ecosystem service assessments is begin-
ning to be realized as it is increasingly clear that early
assessments presented a static picture in a rapidly chan-
ging world. The necessity of considering counter-factual
evidence is now being demanded by conservation
research [18]. In order to improve incentive structures
and institutions, the different stakeholders — that is, the
beneficiaries of ecosystem services, those who are provid-
ing the services, those involved in or affected by the use,
and the actors involved at different levels of decision
making — should be clearly identified. Assessing
economic impacts on ecosystems and biodiversity must
take into account that ecosystems have always been
dynamic, both internally and in response to changing
dynamics of natural environments.
All ecosystems are shaped by people, directly or indirectly
and all people, rich or poor, rural or urban, depend directly
or indirectly on the capacity of ecosystems to generate
essential ecosystem services. In this sense, people and
ecosystems are interdependent social–ecological systems.
It is not surprising that around 1.2 billion marginalized
and poor people are located in fragile and vulnerable
areas, while in many cases not representing the main
drivers of change [19].
A clear understanding of the links between ecosystems
and ecosystem services, and how variation in biodiversity
affects ecosystem dynamics is still needed to map the
temporal and spatial flow of services [20]. This would
help in avoiding double counting and provide necessary
Current Opinion in Environmental Sustainability 2013, 5:78–86
caveats while upscaling the value from local to national
and regional scales. Ecosystems produce multiple ser-
vices and these interact in complex ways, different ser-
vices being interlinked, both negatively and positively.
Delivery of many services will therefore vary in a corre-
lated manner, but when an ecosystem is managed prin-
cipally for the delivery of a single service (e.g. food
production) other services are nearly always affected
negatively [21].
Ecosystems vary in their ability to buffer and adapt to
both natural and anthropogenic changes as well as recover
after changes (i.e. resilience). When subjected to severe
change, ecosystems may cross thresholds and move into
different and often less desirable ecological states or
trajectories. A major challenge is how to design ecosystem
management in ways that maintain resilience and avoid
exceeding undesirable thresholds [22]. There is clear
evidence for a central role of biodiversity in the delivery
of some ecosystem services, from various types of food,
fiber, and raw material production to the spread of inva-
sive species and diseases. However, ecosystems need to
be managed to deliver multiple services to sustain human
well-being and also managed at the level of landscapes
and seascapes in ways that avoid the passing of dangerous
tipping-points.
Many efforts focusing on particular parts of ecosystems or
species, while effective at one level, lack the scope to
control the pressure of commodity markets for land and
water resources surrounding them. As such, and depend-
ing on their biophysical context, they may be limited to
capturing the interdependency of local resource-use sys-
tems nested within larger ecosystems. We can state with
high certainty that maintaining functioning ecosystems
capable of delivering multiple services requires a general
approach to sustaining biodiversity in the long term even
when a single service is the focus [23]. When predicting
the impact of biodiversity change on variability in the
supply of ecosystem services, we need to measure the
impact of biodiversity conservation over a range of
environmental conditions. In the same way, we need to
be able to identify the effect of biodiversity change on the
capacity of social–ecological systems to absorb anthropo-
genic and environmental stresses and shocks without loss
of value [24,25].
To understand and enhance the resilience of such com-
plex, coupled systems, we need robust models of the
linkages between biodiversity and ecosystem services,
and between biodiversity change and human well-being
[26,27]. Understanding these linkages represent
important areas of research for the next decade. Economic
analysis essentially entails the question of methodological
choice of valuation. This in turn is linked with the choice
of indicators and finally, the indicators are a reflection of
the value articulating institutions.
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 The economics of ecosystem services: from local analysis to national policies Kumar et al. 81
Indicators and issues in discounting
Economic analysis requires careful choice of indicators
and measures. The social and cultural contexts in which
value articulating institutions exist and reveal value must
be known to those assigning economic values. Establish-
ing these prerequisites would also provide greater credi-
bility to the estimates that follow. Biophysical
measurements are important since biodiversity, land use
and cover; a biosphere–atmospheric process underpins the
delivery of many ecosystem services and thus forms the
underlying basis of value. Lack of relevant information
would hamper the ability to assess the economic con-
sequences of the loss of ecosystems and biodiversity. A
set of indicators is needed to convey the message of the
consequences of these changes. These should be based on
the integration of methods able to capture the often non-
linear and multiscale relationships between ecosystems
and the benefits that they provide, and which can be
convertible into economic terms, broadly defined to in-
clude nonmonetary as well as monetary values.
Most of the current measures and indicators of biodiver-
sity and ecosystems were developed for purposes other
than the economic valuation assessment, and most of the
economic indicators were developed for financial invest-
ment models. They are therefore limited in their ability
to show clear relationships between components of bio-
diversity and ecosystem services and the benefits they
provide to people. A reliance on these existing measures
will in all likelihood capture the value of only a few
species and ecosystems relevant to food and fiber pro-
duction, and will miss out the role of biodiversity and
ecosystems in supporting the full range of benefits, as well
as their resilience into the future.
While it is possible to obtain preliminary estimates of the
consequences of biodiversity and ecosystem loss using
existing data and measures, these should be complemen-
ted with active research and development into the
measurement of biodiversity and ecosystem change, their
links to benefit flows and the value of these flows,
including nonmonetary, so as to realize the full value
of biodiversity and ecosystem management. Economic
value is only one component of total value. In order to
make a comprehensive and compelling economic case for
the conservation of ecosystems and biodiversity it is
essential to be able to understand, qualify, quantify those
that can be quantified, and estimate the benefits received
from ecosystems and biodiversity [28]. In this sense,
economic valuation and the indicators they provide can
be seen as a form of regulatory adaptation by serving as a
mechanism to provide feedback in a an economic system
where production and consumption, trade and exchange
are so distant from the underlying ecosystem and so
complex in their commercial structure that they may
undermine perceptions of the impacts of human habits
and behaviors on the natural environment. This may
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contribute to address our inability, reluctance or ideo-
logical intolerance to adjust institutions (also those which
are value articulating) to our knowledge of ecosystems,
biodiversity and the human being.
Intertemporal distribution of costs and benefits poses a
challenge for the decision makers in justifying resource
allocation for a project and policies especially when they
have competing demand for the resource available. Also,
groups within and across societies differ greatly in their
direct dependence on biodiversity and the services of
ecosystems. The challenge becomes more severe if the
project entails the impact on ecosystems in the long run.
If the impacts of project through its costs and benefits
accrue too disproportionately to different sectors of
society, it further complicates the analysis. An appropriate
rate of discount can guide better choice of strategies and
response policies for ecosystem management. There is a
fundamental difference between the individual-at-a-
point-in-time discount rate and the social discount rate.
In contrast to the recommendations of conventional
economists, a variety of discount rates, including zero
and negative rates, should be used depending on the time
period involved, the degree of uncertainty, ethical
responsibilities to the world’s poorest, ethical responsi-
bilities toward future generations, and the scope of pro-
ject or policy being evaluated. A low discount rate for the
entire economy might favor more investment and growth
and more environmental destruction. Macroeconomic
consequences of a particular discount rate should be
considered separately, although interrelated, from micro-
economic ones. A critical factor in discounting is the
importance of environmental draw-down (destruction
of natural capital) to estimates of the future growth rate
of per capita consumption. There are no purely economic
guidelines for choosing a discount rate. Responsibility to
future generations is a matter of ethics, best guesses about
the well-being of those in future and preserving life
opportunities. In general, a higher discount rate applied
to specific cases will lead to the long-term degradation of
biodiversity and ecosystems. For example, a four per cent
discount rate implies that biodiversity loss 50 years from
now will be valued at only one-seventh of the same
amount of biodiversity loss today.
Valuation methods and nonlinear changes in
ecosystems
How to value ecosystem services, what are the tools
available, and what are the assumptions necessary to arrive
at credible and transparent estimates and finally come out
with recommended methods to apply in a situation of
nonlinear changes. The literature on valuation is full of
good suggestions [7,13,28,29,30,31,32,33,34] [to
cite a few]. Yet valuation techniques face important chal-
lenges especially regarding uncertainty, irreversibility and
resilience. They are typically found while valuing the
regulating services of ecosystems, such as air and water
Current Opinion in Environmental Sustainability 2013, 5:78–86
82 Terrestrial systems
quality and purification, erosion and flood control, pollina-
tion, disease regulation, among others [35]. Furthermore,
valuation approaches that may be suitable for some devel-
oped regions may be inadequate in developing countries,
thus not being immediately transferable. Hence, standard
valuations approaches need to be carefully adapted to
account for regional particularities.
Estimating the value of the various services and benefits
that ecosystems and biodiversity generate may be achieved
with a variety of valuation approaches. The assumptions
underlying these approaches should be made transparent.
Applying a combination of approaches may overcome
disadvantages of relying solely on a single method. Valua-
tion techniques in general and stated preference methods
specifically are affected by uncertainty stemming from
gaps in knowledge about ecosystem dynamics, human
preferences and technical issues in the valuation process.
There is a need to include uncertainty issues in valuation
studies. However, when uncertainty is compounded by
ignorance about ecosystem functioning or when there is
even a small possibility of disastrous damages, such as
complete ecological collapse of ecosystems, current valua-
tion techniques used to estimate values to feed into
extended cost-benefit analyses are insufficient. Valuation
results will be heavily dependent on social, cultural and
economic contexts, the boundaries of which may not
overlap with the delineation of the relevant ecological
system. It is likely that better valuation can be achieved
by identifying and involving relevant stakeholders. Valua-
tion, including economic valuation, functions as a system of
cultural projection which imposes a way of thinking and a
form of relationship with the environment and reflects
particular perceived realities, worldviews, mind sets and
belief systems. However, it can also serve as a tool for self-
reflection and feedback mechanism which helps people
rethink their relations to the natural environment and
increase knowledge about the consequences of consump-
tion, choices and behavior. Owing to multidimensional and
socio-cultural embeddedness of value any exercise of
valuation is relative to a given individual or group of people.
In a multicultural and democratic context of biodiversity
valuation, this makes the question of choosing a value-
articulating institution more important than that of finding
a correct value. What to leave for future generations when
we do not know what sort of economic and value system the
future generations will have is a daunting challenge [36].
Economic valuation is a complex, spatial and institutional
cross-scale problem. Many efforts focusing on particular
parts of ecosystems or species, while effective at one
level, lack the scope to control the pressure of commodity
markets for land resources surrounding them. As such,
and depending on their biophysical context, they may be
limited to capturing the linkages and vertical interplay
created by a growing functional interdependency of
resource-use systems nested within larger ecosystems
Current Opinion in Environmental Sustainability 2013, 5:78–86
[37]. In addition to vertical linkages, the value of natural
resources changes along their commodity chains with
great implication for the distribution of benefits. These
changes affect directly the level of incentives for con-
servation and, thus, represent an important methodologi-
cal challenge for economic valuation to address.
Undoubtedly, economic valuation would provide useful
information about changes to welfare that will result from
ecosystem management actions, especially with regard to
localized impacts that are fairly well known and far from
ecological thresholds. Valuation practitioners should
acknowledge that valuation techniques face limitations
that are as yet unresolved. They should present their
results as such, and decision makers should interpret and
use valuation data accordingly. Intrinsic values of ecosys-
tem services are culturally embedded. They can be
partially taken into account by choosing the appropriate
institutions which allow their articulation in addition to
utilitarian values.
There are three sources of uncertainty pervading valuation
of ecosystem services and biodiversity that have been
taken into account: first, uncertainty regarding the delivery
or supply of ecosystem services and biodiversity; second,
preference uncertainty; and third, technical uncertainty in
the application of valuation methods. Some promising
approaches are being developed to try to account for such
types of uncertainty but generally valuation applications
disregard the uncertainty factor. And this is a real problem.
The uncertainty regarding the delivery of ecosystem ser-
vices makes stated preference methods complex. Stated
preference methods have generally resorted to measuring
respondents’ risk perceptions. Recognize behavioral
limitations to economic decisions [38]. Preference uncer-
tainty is inversely related to the level of knowledge and
experience with the ecosystem service to be valued. This
source of uncertainty has been relatively better acknowl-
edged in stated preference approaches, for instance by
requesting respondents to report a range of values rather
than a specific value for the change in the provision of an
ecosystem service.
Despite many limitations, valuation exercises can still
provide information that is an indispensable component
of environmental policy in general. But policy makers
should interpret and utilize the valuable information
provided by these techniques while acknowledging the
limitations of this information. It is likely that new
techniques and combinations of different methodological
approaches (e.g. monetary, deliberative and multicriteria
methods) will be needed in order to properly face future
challenges and provide more accurate values that would
benefit decision making processes. A closer collaboration
between physical and social sciences, practitioners and
policy makers may then contribute to develop valuation
techniques that are better suited to dealing with the
complex relationship between ecosystems and the
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 The economics of ecosystem services: from local analysis to national policies Kumar et al. 83
services they provide to the local and global economies.
Future valuation practitioners of biodiversity and ecosys-
tem services should make explicit the procedures and
methods used in their studies as well as openly acknowl-
edge any obstacles that they may have encountered.
The need to integrate micro economic
analysis into macroeconomic approach to
design response policies at national level
The assessment of evidence on the relationship between
ecosystem services and biodiversity helps not only in
identifying the policy-relevant insights but also in filling
the gaps in understanding the science which is critical for
economic analysis. Social and institutional analyses
suggest that valuation is essentially a matter of choosing
how to perceive the human being itself, how to perceive
human’s place in nature and how to perceive nature itself.
This is because the way we perceive our natural environ-
ment determines the way we value and change it [17].
One way of incorporating a multilayered understanding of
human–environment relations, and understanding the
value and motivational linkages between the two, is to
address the large gap that exists between the language in
which the preference of the people for ecosystem services
is elicited and the language in which people feel more at
home. The languages of research and policy show similar
dissonance. The more the discourse moves away from the
common lives and real-life concerns to abstruse quanti-
fication and reductionism, the more people are likely to
give preferences that are fudged and confused as much as
these are confusing, merely because the choices we offer
are far from adequate [16]. Valuation approaches aiming
at addressing complex socio-ecological systems require
attention to the challenge of understanding problems of
credibility, saliency and legitimacy at the intersection of
different knowledge systems and access to information at
different levels and by different groups [39]. In this sense,
valuation mechanisms should be seen as part of a broader
range of diagnostic and assessment tools and political–
institutional mechanisms that facilitate the understand-
ing of complex socio-ecological systems [8], as well as
coproduction, mediation, translation and negotiation of
information and knowledge within and across levels
[37,39]. The main lesson that comes across when one
reviews the literature on valuation and environmental
change is to avoid a ‘one size fits all’ approach, or as
Ostrom [14] puts it when proposing a framework for the
analysis of complex social–ecological systems, we need to
move beyond panaceas. This can further be carried for-
ward for research and must be remembered while design-
ing policies for the national and global decision makers.
One of the major criticisms of economic valuation of
biodiversity and ecosystem services is that most valuation
exercises do not allow for ecosystems and economies to
impact each other simultaneously. Also, although not
necessarily a criticism, the frame of reference for most
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economic analysis of ecosystems is at the firm, household
or individual or industry level. Setting the analysis at the
firm, household or industry level masks potential spil-
lovers associated with actions taken in one sector of an
economy on other sectors, and the corresponding impacts
on macroeconomic variables like gross domestic product
(GDP), aggregate savings rates or trade patterns. Sim-
ilarly, the structural changes accompanying economic
growth (sectoral composition), trade and consumption
patterns can have far reaching impacts on the health
and condition of ecosystems. Two examples of such
impacts are: first, the intensification of agricultural pro-
duction accompanying economic growth, and its impact
on soil salinity, pollution, and water logging, and on
genetic diversity; and second, regional and national sub-
sidies to fish harvesting and the corresponding impacts on
fish stocks and marine biodiversity.
There are other relevant examples where a macroeco-
nomic framework could provide useful insights into how
to better design a response policy to manage an ecosys-
tem. To illustrate, a pertinent issue in the economics of
coastal ecosystems is the impact of economic growth and
the increased conversion of mangrove forests into agricul-
tural or aquaculture uses, and the corresponding impact
on the ability of coastal ecosystems to support fish popu-
lations. Similarly, one can raise concern with the delta
ecosystem destruction due to decreased river flow. In case
of terrestrial ecosystems, an issue that has received much
attention, and will continue to do so in the near future, is
carbon sequestration. A simplistic summary of the current
discussion in Southern countries have potential to serve as
carbon sinks, but deforestation in these countries pro-
vides them with a significant source of income. A natural
question to ask is, if Northern countries want a Southern
country to serve as a carbon sink how much income would
that country forgo if it decreased its desired rate of
deforestation, or stopped it altogether? The answer to
this question likely sets the lower limit on the North’s
offer price to the South country to steward its forest assets
differently. The case of the Yasuni National park in
Ecuador is a good example of this where, the decision
of the Ecuadorian government not to use the oil reserve in
Yasuni National Park to preserve biodiversity and carbon
has not been adequately backed by the funding commit-
ments by the global community.
The micro economic theory based methodologies usually do
not adequately accommodate the interdependencies among
different economic subsectors and ecosystem services.
These methodologies also are not designed to measure
the potential impact of a policy on the entire economy
and its underlying ecosystem. The dependence of conven-
tional economic sectors on ecosystems arises not only
through the use of tangible factors like timber, water and
fish, but also the use of intangible services like waste
minimization, climate regulations or the control of
Current Opinion in Environmental Sustainability 2013, 5:78–86
84 Terrestrial systems
vector-borne diseases [2,3]. Each of these services adds
value to human well-being, but the ability of ecosystems to
provide such services can be influenced by human behavior.
Marine scientists have established a link between mangrove
area and the carrying capacity of fish stocks — loosely
speaking, the larger the area dedicated to mangrove forests,
the larger the stock of fish the coastal ecosystem can support
[32,40]. The simplest economic story embedded in the
relationship between mangrove forest area and fish stock is:
the smaller the mangrove forest, the more costly it should be
to harvest fish. Ignoring the land-conversion process, a
natural question to ask is how will net returns to the fishing
industry change as mangrove area falls? In answering this
question, one might rightfully ignore the rest of the
economy — especially if the fishing area contributes little
to the overall economy. Alternatively, consider an economy
wherein harvested fish are sold to firms who employ capital
and labor to process fresh fish, who in turn compete with
manufacturing and service sector firms for capital and labor.
In this case, a decrease in mangrove area leads to an increase
in fish harvesting costs, which in turn decreases the supply of
fresh fish to processors. This can lead to higher fresh fish
prices, which can place downward pressure on the demand
for capital and labor by fish processors. These interactions
can have implications for regional wages and rates of return
to capital and investment patterns. The two mangrove
examples illustrate that some problems in ecosystem
economics are well suited to microeconomic analysis, while
others are not. Other examples will reveal that some issues
can be examined without explicitly accounting for bio-
physical/ecosystem dynamics, while others should not.
On the other hand, a careful investigation of the economics
of the mangrove-fishery problem in the previous paragraph
likely requires integrating fishery dynamics with a dynamic
economic model having multiple sectors. Another issue
which must be addressed is the relationship between the
relative scale of economic activities and the natural ecosys-
tem to which the economic system is a subset [37,41].
Accounting for scale effects is critical in understanding how
to manage an ecosystem and economy in a sustainable
fashion. This management challenge is directly related to
the concept of the carrying capacity of Nature [42]. Just as the
microunits of the economy — e.g. individual households
and firms — function as part of a macroeconomic system,
the aggregate economy functions as part of a larger system
which Daily [43] refers to as the natural ecosystem. In
response to these omissions, developing a conceptual frame-
work that captures the economics of interactions between
large-scale ecosystems and regional or national economies
would facilitate the design of regional and national ecosys-
tem and biodiversity policy.
Aligning microeconomic findings with
macroeconomic policies
While doing valuation one would need to know what is
the appropriate balance between ‘more diverse
Current Opinion in Environmental Sustainability 2013, 5:78–86
landscapes generating bundles of ecosystems services’
and more intensively managed ecosystems like mono-
cultures for food production [44]. The other relevant
question would be of the trade-offs and complementa-
rities involved in the provision of bundles of ecosystem
services, and how do changes in the configuration of
ecosystems affect their value [21]. Further, the decision
makers would like to know the most effective mechan-
isms for the governance of nonmarketed ecosystem ser-
vices, and how can these be designed so as to exploit
future improvements in our understanding of the
relationships between biodiversity, ecosystem function-
ing and ecosystem services. The detailed assessment of
available scientific findings on economics of ecosystems
also poses some of the questions like how can we better
quantify and qualify effects on regulating ecosystem
services of an increase in nonsustainable use of provi-
sioning services, what tools can contribute to accurate
mapping of land and seascape units in terms of function-
ing and service provision, what specific tools could con-
tribute to better assessment of spatial and temporal
dynamics of service provision, especially in relation to
defining who benefits, where and to what extent [45],
and finally, what are the impacts of climate and related
environmental changes on ecosystem functioning
through effects on species (re)distribution, numbers
and process rates. Economics of ecosystem services
and biodiversity must keep these questions in center
while doing valuation and designing national level
policies.
There is always the risk that misguided policy-makers
or exploitative interests may want to use the signal
based on prices for the wrong ends. Therefore valuing
the flows and stocks of Nature is ethically valid so long
as the purpose of that exercise is, first and foremost, to
demonstrate value in order to instigate change of beha-
vior, and to pre-empt damaging trade-offs based on the
implicit valuations that are involved in causing the loss
of biodiversity and degradation of ecosystems. There is
also a need to use existing knowledge and examples of
success to develop more effective governance institu-
tions, including property rights regimes and regulatory
structures. Recognizing that biodiversity and ecosys-
tems underpins the foundations of economies, and of
human well-being, is one thing. Translating that knowl-
edge into concrete changes that will influence behavior
for the better is another, formidable challenge. It is one
that must be met if the failures of the recent past are
not to be repeated and compounded, with the potential
for ever-increasing human and financial costs. The case
for greater economic and ecological caution in addres-
sing natural capital is not only necessary but possible,
and indeed, that it is amply evidenced in many
instances which deserve more attention, investment,
and opportunity to replicate and to scale into wider use
around the world. In sum, the Economics of Ecosystems
www.sciencedirect.com
 The economics of ecosystem services: from local analysis to national policies Kumar et al. 85
and Biodiversity report (TEEB) could demonstrate the
importance of economic analysis of changes in ecosys-
tem services and biodiversity. It has successfully orga-
nized the complexities typically faced by the
researchers and policy makers dealing with ecosystem
services and biodiversity, their indicators and numerous
challenges found in valuing them.
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