The Economic Value of Environmental Amenities and Restoration for Rural Land in New Zealand A review for Tūmai Beach Sanctuary prepared by Soren Ian Moller Ecosystems Consultants Report Number 2012/02 August 2012 Suggested citation for this report: Moller, S.I. (2012) The Economic Value of Environmental Amenities and Restoration for Rural Land in New Zealand. Ecosystems Consultants Report No. 2012/02, 22 + vi pages. This report was produced by: Ecosystems Consultants Ltd 30 Warden St Opoho Dunedin 9010 New Zealand www.ecosystemsconsultants.co.nz Telephone: 0 3 4730024 or 027 2268688 Email: [email protected] Cover photo credits: Ashli Akins, Darren Scott, Henrik Mouritson, Lonna Lisa Williams Rural land values _______________________________________________________________________________________________________________________________________________________ Executive Summary Environmental amenities located in rural lands and landscapes provide a range of ecosystem services to people. The economic value of these ecosystems services includes their use value, option value, and non-use value. These values are at least partially capitalised into land prices. Through a review of the literature from New Zealand, the US, and Australia, this study aimed to investigate the value of various environmental amenities associated with rural landscapes, and the extent to which they influence land prices. Firstly, a theoretical framework was developed outlining economic value and ecosystems services. This conceptual model helps to explain which ecosystems services are likely to be capitalised into land prices. Secondly, the advantages and disadvantages of the two major methodological approaches to the valuation of environmental amenities were compared. These are the stated preference and revealed preference models. Thirdly, the results of relevant case-studies were examined. Stated preference studies suggest New Zealanders place a high value on environmental restoration and biodiversity. However, because the revealed preference method has not been widely used in New Zealand outside of urban markets, it is difficult to quantify the impact of environmental amenities on rural land prices. As a next best alternative, international studies gave a general indication of the impact of proximity to environmental amenities such as forests, wetlands, and the coast on land prices. Due to the case-specific nature of results, especially as they are linked to specific locations, these results must be treated with caution when removed from their original geographical contexts. This review of five New Zealand and eighteen overseas case studies identified instances where people preferred property that: 1. offers good views, especially overlooking water (sea, lakes, rivers and estuaries) 2. has a diversity rather than uniformity of views 3. is relatively close to cities or towns that supply services, employment and schools 4. provides reliable vehicle access and proximity to an airport 5. provides or is close to recreational opportunities (swimming, boating, fishing, tramping, skiing) 6. is near the coast 7. has a reliable water supply 8. includes some forest, though is not predominantly forested 9. provides a diverse landscape with fragmented forest patches and more complex natural forest edges 10. is close to wildlife habitat, wilderness and/or protected natural areas 11. is contributing active restoration of biodiversity and ecosystems 12. is close to but not immediately next to rivers and wetlands 13. is not at risk of flooding 14. does not have odours or insects 15. has productive potential (forestry or agriculture). iii Rural land values _______________________________________________________________________________________________________________________________________________________ The specific magnitude of these effects in terms of a dollar value of land cannot be directly applied to a New Zealand context without further primary research. However, the international literature gives a reasonable estimate of the likely direction of value impacts related to the proximity to environmental amenities, and the relative importance of different environmental amenities, in New Zealand. iv Rural land values _______________________________________________________________________________________________________________________________________________________ Contents The Economic Value of Environmental Amenities and Restoration for Rural Land in New Zealand Executive Summary ................................................................................................................................ iii Introduction ............................................................................................................................................ 1 Economic Value and Ecosystems Services .............................................................................................. 2 Methodologies for Valuing Environmental Amenities............................................................................ 4 Stated Preference: Contingent Valuation and Contingent Choice ..................................................... 5 Revealed Preference: Hedonic Analysis .............................................................................................. 5 New Zealand Case Studies ...................................................................................................................... 6 New Zealand Stated Preference Studies Valuing Biodiversity and the Environment ......................... 7 Case Study 1: Te Kouma Farm Park Benefit Transfer Study: .......................................................... 7 Case Studies 2 and 3: The Value of Biodiversity Enhancement: ..................................................... 8 Case Study 4: Lake Rotoiti Biodiversity Management Choice Modelling: ...................................... 9 New Zealand Revealed Preference Studies ........................................................................................ 9 Case Study 5: Examining Changes in the Value of Rural Land: ....................................................... 9 Urban Hedonic Analyses: Water Views and Environmental Amenities: ......................................... 9 International Case Studies: ................................................................................................................... 10 Hedonic Studies Investigating Environmental Amenities and Rural Land Values ............................ 11 Case Study 6: Ecosystems Services from Rural Landscapes in Southwest Michigan: ................... 11 Case Study 7: High Value of Environmental Amenities in Northwest Montana ‘Wildland-urban Interface Communities’: ............................................................................................................... 11 Case Study 8: Agricultural Production Attributes and Environmental Amenities, Wyoming: ...... 11 Case Study 9: Value of Scenic, Recreational, and Productive Attributes, Wyoming: ................... 12 Case Study 10: Determinants of Farmland Prices in Minnesota:.................................................. 12 Case Study 11: Effects of Proximity to Urban Centres, Recreational Amenities and Productive Factors, Kansas: ............................................................................................................................. 13 Hedonic Studies Valuing the Proximity to Forests ............................................................................ 13 Case Study 12: The Value of Forest Land and Degree of Urbanisation, Tennessee: .................... 13 Case Study 13: Increasing Value of Forest Landscapes in the Southern Appalachian Highlands between 1990 and 2000: .............................................................................................................. 13 Case Study 14: Value of Proximity to Noosa National Park: ......................................................... 13 v Rural land values _______________________________________________________________________________________________________________________________________________________ Case Study 15: Valuing Environmental Assets on Rural Lifestyle Properties in Victoria, Australia: ...................................................................................................................................................... 14 Coastal, Estuarine and Wetlands Studies ......................................................................................... 15 Case Study 16: Meta-review of the Value of Wetlands: ............................................................... 15 Case Study 17: Meta-review of the Recreational, Aesthetic and Cultural Values of Coastal and Estuarine Ecosystems: ................................................................................................................... 15 Case Study 18: Choice Modelling Study of the Macquarie Marshes, NSW: ................................. 15 Case Study 19: Hedonic Analysis of the Value of Wetlands in the Perth Metropolitan Area: ..... 15 Case Study 20: Meta-review of Studies Valuing Watershed Restoration: .................................... 16 Case Study 21: Benefits Transfer Estimating the Direct and Indirect Use Values Associated with a Coastal Restoration Project, Biscayne Bay, Florida:...................................................................... 16 Case Study 22: Combined Stated and Revealed Preferences for Restored Coastal Wetlands: .... 16 Case Study 23: Contrasting Values of Coastal and Inland Wetlands, North Carolina:.................. 16 Discussion and Conclusions .................................................................................................................. 17 References ............................................................................................................................................ 19 Acknowledgements Relevant literature was provided by Sophal Chhun (Centre for Sustainability, University of Otago) and Prof. Caroline Saunders (Agribusiness and Economic Research Unit, Lincoln University). Henrik Moller and Fiona Stirling provided comments and proof read and formatted the report. Preparation of the report was funded by Peter & Irene Walton (Walton’s Limited, 10 Rimu Lane, Wanaka), for Tūmai Beach Sanctuary (http://www.tumaibeach.co.nz/). vi Rural land values _______________________________________________________________________________________________________________________________________________________ The Economic Value of Environmental Amenities and Restoration for Rural Land in New Zealand Introduction Economic valuation techniques are increasingly being applied to guide land use acquisition and ecological restoration interventions for the conservation of biodiversity and provision of ecosystem services (Pearce 2006). Calculation of the economic returns from land care and provision of services (eg. erosion and flood control, pest control, pollination, aesthetics) and recreational opportunities could incentivise restoration investments, prioritise where and when such investments are most cost-effective, and help achieve land owner and public consensus of how to strike the balances between trade-offs in land use for conservation and production (Polyakov et al. 2012). Economic tools focus on choice and the barriers and enablers for triggering change. Their application can guide managers on the likely level of adoption of ecological restoration investments on private land, the need or otherwise for provision of public funds to defray private landowner costs of restoration and associated provision of public good, and policy directives for regional scale environmental enhancement (Polyakov et al. 2012). Nevertheless, many of the intangible values motivating ecological restoration are extremely difficult to measure in dollar terms because the activity and its products are never, or at least only indirectly, traded in markets. Although economic valuation tools clearly have immense, and as yet are underused benefits for guiding conservation, they are unlikely to provide a complete picture if applied without the support of qualitative and soft-systems research tools (Phipps et al. 2011). Protection and enhancement of ecosystem services in New Zealand’s production landscapes is critically dependent on provision of ecological refuges from agricultural disturbance and intensification (Meurk & Swaffield 2000; Perley et al. 2001; Blackwell et al. 2008; Lee et al. 2008; Meadows et al. 2008; Moller et al. 2008a, b). A greater variety of plant species and a diversity of vegetation structure (especially shrubs and trees) will provide ecological opportunities for the persistence of biodiversity, which in turn provides pollination, pest control, decomposition and nutrient cycling to keep biological production going. An increasing proportion of farmers and other New Zealand citizens value biodiversity for its own sake and for aesthetic reasons, irrespective of the benefits it provides for production of food and fibre. Meurk & Swaffield (2000) suggest that at least 25% cover of woody vegetation is required to secure ecologically resilient pastoral ecosystems. If so, large areas of New Zealand’s farming areas will have to be replanted for their long term sustainability. Some farmers are understandably concerned that such diversion of farmland to “non- productive” ends will affect their economic returns and land values, and the cost of planting can be 1 Rural land values _______________________________________________________________________________________________________________________________________________________ considerable and time consuming (Fairweather et al. 2010, Meadows 2012, Fukuda et al. in prep.1). Unfortunately there have so far been very few economic studies of the potential impacts, both positive and negative, of environmental amenities and restoration on rural land values in New Zealand. This report provides a brief review of the available studies in New Zealand and overseas to indicate the likely direction of impacts on rural land values from the presence or proximity of woody vegetation and other ecological refuges (eg. lakes, rivers, estuaries, wetlands, coastline). My primary goal was to see whether reliable calculations of the economic value of environmental amenities and restoration are already available for New Zealand rural land. Subsidiary questions included how much such values are capitalised into land prices; whether the international literature might be able to predict what is happening in New Zealand; and what type of factors should be incorporated in future New Zealand research. First, I develop a theoretical framework outlining economic value and ecosystems services. This conceptual model helps to explain which ecosystems services are likely to be capitalised into land prices. Second, I evaluate the advantages and disadvantages of the two major methodological approaches to the valuation of environmental amenities and conclude that revealed preference methods are by far the most reliable. Third, I examine the results of relevant case-studies in New Zealand. However, because it turned out that the revealed preference method has not been widely used here other than in urban markets, it proved difficult to quantify the impact of environmental amenities on New Zealand’s rural land prices. As a next best alternative, I conclude by reviewing international studies to give a general indication of the impact of proximity to environmental amenities such as forests, wetlands, and the coast on land prices. Economic Value and Ecosystems Services An economic analysis2 of the value of the environmental deals specifically with the benefits humans derive from environmental resources and amenities (Pearce 2006). Within this framework, ecosystem services are defined as the flow of benefits people obtain from ecosystems (Millennium Ecosystem Assessment 2003). The different values that are obtained from ecosystem services stemming from an environmental resource can be categorised as use value, option value, and non- use value (see Fig. 1). Use value accounts for the benefits of using an environmental resource. Use 1 Yuki Fukada, Wendy McWilliam and Henrik Moller are currently completing analysis of shelterbelt provision and management on New Zealand dairy farms that emphasise the costs and benefits of woody vegetation for production. 2 The case studies reviewed below adopt a neoclassical economics approach to natural resources. A full consideration of the advantages and limitations of the neoclassical framework are beyond the scope of this study. Steenstra (2008) provides a short introduction to the debate surrounding the appropriateness of the neoclassical approach, including a discussion of sceptical views toward ‘monetary reductionism’. A significant criticism of economic valuation is its inability to accurately capture or do justice to cultural and intrinsic values, which are central to many people’s interaction with, and understanding of the environment. On the other hand, Pearce (2006) addresses some of the criticisms towards economic valuation. While the shortcomings of the approach cannot be discounted, economic valuation does provide a useful, albeit incomplete, tool to assist decision making. 2 Rural land values _______________________________________________________________________________________________________________________________________________________ value may be direct or indirect. Direct use value provides a direct benefit to users, for example, timber from forests. Indirect use value is derived from the role ecosystems services play in supporting the function of ecosystems and the flow of direct use benefits. Examples include the purification of air and water, maintenance of biodiversity, and nutrient cycling. Option value accounts for the potential future benefits received from the environment. Non-use value includes existence value, which is derived from knowing that something exists, and bequest value, which comes from leaving something for future generations (McConnell and Walls 2005; Steenstra 2008; Ma and Swinton 2011). Economic Value Use Value: Benefits obtained Option Value: The potential Non-Use Value: The value from using an environmental future benefits obtained derived from an r esource from use/non-use of an environmental resource environmental resource independent of its use Direct Use Value: Indirect Use Value: Existence Value: Bequest Value: The Provides a direct Provides an indirect The value from value from leaving benefit to users benefit through its knowing that something for role in maintaining something exists future generations ecosystems and supporting direct use value Figure 1: Economic Value of Environmental Resources Based on their different use values, Ma and Swinton (2011) outline four basic types of ecosystems services located in rural land and landscapes. Provisioning ecosystems services provide direct use benefits such as the production of basic primary products from environmental resources. Recreational, aesthetic, and cultural ecosystems services provide direct use benefits such as access to recreational activities and scenic appeal. Regulating ecosystems services involve ecosystems processes that regulate aspects of the environment including water quality and quantity, erosion, pollination, climate, ecological disturbance patterns, pest populations, and other outcomes. Finally, 3 Rural land values _______________________________________________________________________________________________________________________________________________________ supporting ecosystems services underpin the existence of ecosystems and therefore enable the flow of other ecosystems services. Important examples of supporting ecosystems services include soil formation, nutrient cycles, and genetic biodiversity. Regulating and supporting ecosystems services provide indirect use value through the role they play in maintaining healthy functioning ecosystems, enabling and sustaining a stream of direct use benefits. The benefits provided by direct use values are easily identifiable to people. Where markets exist, they may also provide a source of income. Therefore, the direct use values of productive, recreational, aesthetic, and cultural ecosystems services are likely to be capitalised into land prices. For regulating and supporting ecosystems services which provide indirect use value, only those ecosystems services that strongly contribute to direct use values are likely to influence land prices. The extent to which they are capitalised will depend on people’s awareness of their existence and their perceived importance (Ma and Swinton 2011). A further feature of ecosystems services determining the extent to which they are capitalised into land prices is their status as public goods or private goods. Whether an ecosystems service is classified as a public or private good depends on the characteristics of ownership and consumption. The key traits defining private goods are excludability of ownership and rivalry of consumption. Excludability of ownership refers to the ability to exclude others from consuming the benefits of a good or service. Rivalry of consumption implies that the consumption of a good or service by one person reduces its availability to others. While goods or services that are excludable and rival are classified as private goods, those that are non-excludable and non-rival are public goods.3 Although the property rights of rural land are legally well defined, the ecosystems services from those lands may not be. This is particularly important for regulating and supporting ecosystems services such as climate regulation, nutrient cycles and biodiversity. They have the properties of public goods in that they benefit the entire population. Because private actors lack an incentive to pay for public goods, their value is unlikely to be capitalised into land prices (Ma and Swinton 2011). In summary, in terms of human benefit, the total value of environmental resources can be divided into use value, option value and non-use value. Economic theory predicts that ecosystems services that are private goods and have direct use value will be largely capitalised into land value. Ecosystems services that provide indirect use value may be partially capitalised. The non-use value and indirect use value of ecosystems services that have the characteristics of public goods will not be capitalised. Methodologies for Valuing Environmental Amenities Because many ecosystems services are not traded directly in markets, economists have developed a range of methods to infer the value of environmental amenities. The two major approaches to estimating the value of environmental amenities are stated preference and revealed preference 3 The categories of private and public goods are ideal types. Agricultural products with well-functioning markets can be classified as private goods. On the other hand, ecosystems services that help to regulate the climate are an example of a public good. Most other ecosystems services will fall somewhere between these two extremes. 4