It’s high time for us to talk about the elephant in the room: Valuation. I say elephant because the topic and process of valuation do have some pitfalls and philosophical challenges. But ignoring its role and potential is causing worse outcomes. So let’s explore why value is so important, and why ignoring it leads to a lower quality of life.

The catalyst for this blog stems from a discussion that occurred last week at an ecosystem services conference. There were excellent presentations and many sharp audience inquiries that danced around (or piercingly hit at) the fundamental question underpinning the Genuine Progress Indicator (GPI): how do we put a monetary value on that which does not have a price?

Before we can delve into the topic of valuation, though, we need to understand the differences between ‘price’, ‘cost’, and ‘value’. To illustrate, here’s a scenario:

You make the decision to finally build that new deck out back or a tree house for your kids. So you head down to your local hardware store to buy some 2x4’s. There, the ‘price’ for the wood is probably around $3 dollars each. And, it doesn’t take an MBA to know a company can’t stay in business if its costs are more than its price. So we can assume the ‘cost’ of the wood is probably less than the price. But price and costs alone fail to fully account for the true ‘value’ of your 2x4s. So we’re left to wonder: What is the full value of that wood?

Is the price of wood equal to the full value of a forest?

Now I’m not merely talking about its economic value, mind you. The question we’re asking is: What is the full value of a forest and its services to people and nature? Trees purify water, supply oxygen, sequester carbon, provide habitat, cool streams, and offer countless other benefits. With all that value, can we really believe that its true ‘worth’ is only a few dollars a slat? In other words, Is the full suite of a forest’s ecosystem services captured in the price you pay for its lumber? Simply put, no.

But it gets worse. Below is the budget for the Washington Suburban Sanitary Commission (WSSC). There, you will see where each dollar goes to provide water and sewer to DC area residents. But can you see something missing? Where is the cost of the water? Yeah, nowhere to be found. The fact is, none of us has ever paid for a drop of water in our lives. Instead, we pay for the transport of water: pipes, bottles, faucets, etc. And we know if you don’t pay for something, you have no incentive to conserve it.

Where is water in the budget?

So what does this all mean? It means that we – consumers – are not paying the true, full ‘value’ of the benefits our environment provides to us. We are, in essence, running an ecological debt. And have been for decades. Oh, we pay for it eventually if we want clean air, potable water, fishable streams, and a healthy Bay. But as the old car commercial said, “Pay me now or pay me later”…but for a whole lot more!

And these examples are only “treehugging” issues. What about human health impacts and social well-being? For instance, the costs of seatbelts and air bags in cars? When they first came out, many thought these added costs would hurt the auto industry. But really, Is the price increase of a seatbelt not worth the value of reduced injuries or even death to a beloved family member? Of course it is, but the challenge lies in how we quantify that value.

This distinction between price, cost, and value is the core issue when considering the concept of valuation. That is, attaching a monetary figure on that which the market undervalues (2x4’s) or does not recognize at all (water). If you’re interested in the principles of valuation, you can learn more here. And, there are various methods economists use to do quantify the priceless. But that’s for a future blog.

Clearly, we need a new system that simultaneously appreciates an interconnected set of cogs and gears: prices, costs, and values within our economic, environmental, and social interactions. That is the concept, at least in economic terms, of the Triple Bottom Line. You can learn more here, but this site is even more telling, as it’s from the Economist and highlights the inherent difficulties of measuring easily quantified profits and ecosystem and societal benefits. Thus, the need for valuation.

Until we as a community include the full value nature and people provide into the price of the goods and services we consume, there is no way we can enjoy a healthy environment and sustainable society. Period. And the first step in accounting for those true costs is through valuation. The Maryland GPI is one approach Maryland is exploring to calculate and combine those values into a single monetary number.

Once armed with those figures, policy makers and budget analysts are better prepared to make the tough decisions on how best to allocate scarce funding and spur our economy, restore our treasured natural resources, and improve social well-being for all Marylanders.

Sean McGuire, Maryland DNR