Willingness (and ability) to pay is the foundation of the economic theory of value. The idea is, if something is worth having, then it is worth paying for. The idea extends to environmental resources like water quality and natural resources like trees. The key assumption is that environmental values are anthropogenic. Whatever people think the environment is worth is what it is worth. Economic methods can be used to attach estimates of willingness to pay to changes in the level of environmental quality and natural resource use.
Environmentalists and natural scientists tend to dislike this idea since people are ugly, dirty, crass and never satisfied (an assumption of the neoclassical theory of value is "more is better"). About a decade ago a group of ecological economics challenged this concept of value in their paper The Value of the World's Ecosystem Services and Natural Capital.
Here is the abstract:
The services of ecological systems and the natural capital stocks that produce them are critical to the functioning of the Earth's life-support system. They contribute to human welfare, both directly and indirectly, and therefore represent part of the total economic value of the planet. We have estimated the current economic value of 17 ecosystem services for 16 biomes, based on published studies and a few original calculations. For the entire biosphere, the value (most of which is outside the market) is estimated to be in the range of US$16-54 trillion (1012) per year, with an average of US$33 trillion per year. Because of the nature of the uncertainties, this must be considered a minimum estimate. Global gross national product total is around US$18 trillion per year.
The key concern among environmental economists is that the annual value of the environment is estimated to be about twice that of annual income. In other words, the value of the environment is priceless. [update: underlined words]
Neoclassical economists had a conniption. How in the world is the world's value greater than income? The study's methodology failed to consider substitution possibilities, etc, etc.
Update: Also, environmental values needed for policy analysis are marginal values (i.e., additional). The total value of national forest lands is irrelevant to a decision of whether to allow clearcuts in national forest X.
Now, Costanza and his colleagues at UVM’s Gund Institute for Ecological Economics have launched a project to solve a central problem that this young science faces: creating a fast way for policy-makers to understand the specific ecosystem services in their area—and the impacts of different land use decisions—whether looking at a local watershed or whole continent.
Here is what they'll be doing:
To build the new models, Costanza’s team will gather experts on a range of ecosystems to two extended meetings in Burlington, one this fall and another next spring. In small teams, they’ll link together the latest understandings of how forests, grasslands, wetlands, open ocean, and other ecosystem types function with detailed maps of where these natural communities occur and other geographic information.
Next, these models will be informed by new methods of estimating the value of ecosystems. Conventional economics has relied on the rather clunky notion of “willingness to pay” to determine how much a product is worth. This approach doesn’t apply well to many ecosystem services that are either indispensable—like air to breathe—or exceedingly subtle—like global climate regulation.
"Instead, we’re looking for effects of ecosystems of human welfare, whether people perceive them or not—rather than just asking them how much they’d pay for this service," Costanza said.
In other words, the experts will decide what the environment is worth and regular folks, those who make economic decisions about the environment, can deal with it. And by the way, the environment is priceless.
I hate to sound like a great big jerk, but I don't think these are the correct dollar environmental benefits to compare to the costs of policies and projects. For instance on average, consider a policy that would generate economic benefits of $100 million annually. Given the methods of the ecological economists, on average, the environmental cost will be twice that and there will be no economic policy implemented. Maybe ever. Maybe that is a good thing. Maybe it isn't.