Valuation of Biodiversity Benefits (OECD)

average in every way, for example, an increase in functional capacity of 10% would be expected toresult in a similar 10% increase in expected levels of function, service, and value. (.1 X 1 X 1 X 1= .1)Now consider Site A and Site B in Figure 7.1 and assume that Site A is in a location that is20% above average in every way and that Site B is in a location that is 20% below average in everyway. Since we assumed that the size, shape, and biophysical characteristics of Site A and Site B arethe same they would rank the same in terms of functional capacity, and an investment to achieve a10% increase in functional capacity at both sites would yield the same on-site results and cost aboutthe same. However, because Site A is 20% above average in every way, a 10% increase in functionalcapacity at that site would result in a 12% increase in function, a 14% increase in service, and a 17.3%increase in value (.1 X 1.2 X 1.2 X 1.2 = .173) (see Figures 7.2 and 7.3). Similarly, since Site B is20% below average in every way the same 10% increase in on-site functional capacity would result inonly an 8% increase in function, a 6.4% increase in service, and a 5.1% increase in value (.1 X .8 X .8X .8 =5.1) (see Figures 7.2 and 7.3). This implies that investments aimed at improving functionalcapacity at Site A would result in 340% more economic value than similar investment at Site B. 42 Italso implies that allowing wetland mitigation trading that involved gaining an acre of wetland at Site Band losing an acre of wetland at Site A would result in an economic loss of 340% even though the sitesthemselves are identical.Value-based analyses such as this could support significant changes in the way ecosystemsare compared. In the case of wetland mitigation trading, for example, gains and losses are frequently“scored” using area measures or biophysical measures that reflect functional capacity. In suchinstances, wetland acreage at Site A and Site B in Figure 7.1 would be considered an even trade.However, if trading rules were designed to achieve “no net loss” of wetland value, the trading rules,based on the indicator system outlined above, would require a “compensation ratio” of at least 3 or4 acres of wetlands at Site B to compensate for each 1 acre of wetland lost at Site A. 43Specification and Measurement of IndicatorsFunctional Capacity IndexThe Functional Capacity Index reflects the capacity of the site to provide a particularfunction independent of its landscape context. It is based on biophysical characteristics of the siteincluding soil, topography, vegetative cover, and hydrology. The approach described here assumesthat an accepted ecosystem assessment method has been used to “score” sites in terms of theirfunctional capacity. The recently developed “hydrogeomorphic” or HGM method of assessing4243The 340% difference her results because the indicators are designed to be multiplicative. For example,if one site provides 20% more services than another and each unit of service provided is worth 20%more than at the other site the difference in the value of services at between the sites is 44% (1.2 X1.2). In the illustration Site A is 20% above average with respect to four multiplicative indicators andSite B is 20% less than average in each indicator category. As a result Site A achieves a cumulativevalue of 1.73 (1 X1.2X1.2X1.2) and Site B attains a value of, 51 (1X0.8X0.8X0.8); using thedifferences in these indicator scores Site A is 340% more “valuable” than Site B ((1.73 – 0.51) / 0.51).In wetland mitigation the phrase “compensation ratio” is used to refer to the number of acres ofcreated, restored, or enhanced wetland areas required to offset the loss of one acre of natural wetland.An economic interpretation of these ratios and a formula for estimating them using a net present valueformulation is presented in King et al (1993).136