1 Value of Lakes as a Natural Asset

Introduction

We cannot image a world without freshwater lakes. Without such lakes, the planet’s ecosystems and the life they support would be drastically affected. Freshwater lakes offer numerous benefits to humans and other living forms. For humans, they encompass vital services providing clean water for consumption and irrigation, fish, natural buffers against flooding, and recreational, spiritual, and cultural opportunities. Moreover, lakes play a pivotal role in the earth’s biogeochemical processes by maintaining the planet’s water, carbon, and nutrient balances. This maintenance ensures environmental equilibrium and supports the biodiversity of life forms. In this chapter, we describe how to place a value on Lakes and its ecosystem services.

In a recent paper, Li and Tsigaris (2024) estimated the value of freshwater lakes worldwide. The viewpoint article was published in the prestigious journal Ecology Letters, and the perspective article is titled: “The Global Value of Freshwater Lakes”. In the paper, we addressed the threats faced by lakes due to human activities and their implications on the ecosystem services of lakes. The research estimates the global ecosystem services of lakes to be within USD 1.5 to 5.5 trillion annually, with their natural asset value being comparable to the global real estate market using a relatively high social discount rate. However, due to environmental degradation and the possibility that future generations may not be better off than the current generation, the global value of lakes today rises to be at least equal to the global wealth created which is estimated at 1,500 trillion. This valuation emphasizes the shared wealth of our natural resources, contrasting the skewed distribution of created wealth. In this chapter, we are addressing the methodology we used to estimate the value of lakes which will be used in this book.

Social Discounting of Ecosystem Services

Lake ecosystem services are a perpetual flow that happen every year. Because ecosystem services accrue over time, we discount their valuation of future monetary benefits in order to determine the lakes’ current value. Discounting the values ecosystem services to future generations can be contentious and potentially go against Indigenous principles. Prominent philosophers and economists have discussed and puzzled over this matter. A 3.5% annually has been the traditional discount rate used to discount future ecosystem services and changes arising from policy such as restoration of degraded natural assets (Boardman et al., 2010; Haacker et al., 2020).

Purpose of Social Discounting

From a social standpoint, there are several reasons why we undervalue the future today. Two common reasons to discount from a social perspective is due to the social rate of time preference (i.e., social impatience) and economic growth.

[latex]r =\rho+ng[/latex]

where, ρ is the social rate of time preference, g is the growth rate of income (consumption) per person, and n measures the elasticity of marginal utility of income from a rising income, which marginal utility diminishes as income increases. Namely the fact that an extra $ to a rich person is worth much less than extra $ to a poor person. The extra utility (happiness) a billionaire gets from one extra $ is much lower than the extra happiness a homeless person will get from an extra $. The evidence indicates that elasticity of marginal utility of income is elastic, n >1. However, discounting based on impatience for intergenerational distribution of public projects is morally wrong.

For social rate of time preference, we use a rate similar what Stern (2007) used which is 0.1% in case a catastrophic event happens over the next 1000 years destroying all living beings.  The question is what to use for the economic growth, n*g for discounting based on the assumption that future generations will be richer than the current generation. This assumption may be false given the significant environmental and ecological damage the Industrial Revolution is causing to the planet. It could be the case that future generations may be worse off than the current generation. Maybe the economic trajectory is towards a lower standard of living. If there is no long-run economic growth, then the appropriate social discount rate is 0.1%. In the case where there is economic growth, we will use a 3.5% as the social discount rate with the elasticity of marginal utility of income at 1.7 and growth of income or consumption at 2%.

Value of Lakes with Social Discounting

The value of ecosystem services lakes provide will increase over time as the standard of living increases. It is reasonable to assume that the value of yearly services of lakes grows around g% per year. This figure could be the average growth rate of the world’s standard of living as measured by the growth rate of GDP per capita worldwide over the long run. Thus, the value of lakes today is the present value of the value of ecosystem services per year discounted:

[latex]V=\dfrac{ES_t}{r-g}[/latex]

The formula represents the valuation using the Gordon Growth Model, where V is the lake’s intrinsic value, ES is the yield that that lakes provide to society in terms of ecosytem services measured at time t, r is the social discount rate, and g is the growth rate of the value of ecosystem services per year. We assume that the value of ecosystem services also grows at the rate of consumption per person at the rate of 2% per year. Hence, this book will use two social discount rates to assess the value of lakes: 1.5% which is obtained from 3.5% minus 2% and 0.1%. The latter rate assumes that we have done serious harm to nature and the future generations will not be richer than the current generation.  Worth quoting Oren Lyons:

Media Attributions

Figure 1: “Canada, British Columbia, Kamloops Lake” by Hedwig Storch (2006), via Wikimedia Commons, is under a CC BY-SA license.

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