Replacement cost provisioning services

Replacement cost method

Suitability for the FES to be valued:
Provisioning services: non-wood forest products, water supply, raw materials,
Regulating services: erosion prevention, water purification, disturbance prevention
Cultural services: aesthetic values,
Supporting services: nutrient cycling
Description of the method:
The loss of a natural system service is evaluated in terms of what it would cost to replace that service. It is perhaps more realistic method of re-creating non-marketed benefits consists in replacing specific natural ecosystem functions or assets with man-made production processes and capital, instead of relying on the restoration of the original ecosystem or function to provide the original level of benefits. This technique generates a value for the benefits of an environmental good or service by estimating the cost of replacing the benefits with an alternative good or service. It rests on the availability of such an alternative for the original good or service. The alternative should produce, as nearly as possible, the same level of benefits supplied by the resource or environmental function being valued. This technique rests heavily on the assumption that replacing the original good or service is worthwhile, and that the benefits generated by the investment in replacement outweigh the costs of replacement.
Benefits of the method:
Costs incurred by individuals in order to avoid damages at already existing goods can be interpreted as a lower bound of the willingness to pay for this good
Useful in estimating indirect use benefits when ecological data are not available for estimating damage functions with first-best methods
Limitations of the method:
The replacement cost method can undervalue the benefits as only market information is used and wider social, environmental and economic benefits are not considered
No measure of individual utility if only decision-maker´s preferences count or if only “experts” decide about costs of public budgets
In some cases, the replacement cost may be higher than the benefit gained from the replacement (and economic efficiency demands that the marginal benefit equals marginal cost)
May overstate willingness to pay if only physical indicators of benefits are available
There are also data issues and limitations, and these have an important impact on the results that can be generated by this method