Opportunity Cost Estimation of Ecosystem Services

Land-use changes rank among the most significant drivers of change in ecosystem services worldwide. The enhancement of important services such as biodiversity and carbon sequestration requires modifications in land-use that can lead to the decline in other ecosystems services. Targeting the most suitable areas for particular land-uses based on comparative advantages requires opportunity cost information across large regions. This is a demanding task because the input-output relations are ill-defined and determined by spatially heterogeneous operational and environmental conditions. To address this methodological challenge, this paper presents a two-stage semiparametric technique that enables multi-dimensional production possibility frontiers to be estimated from data provided by biophysical models. Specific advantages of the proposed frontier approach are its flexibility with regard to assumptions on the convexity of the production possibility set and its freedom from any separability assumptions for the input-output space and the space of the heterogeneous background variables. The method is illustrated for a case study of 18 Central and Eastern European countries. Results show that opportunity costs of changes in ecosystem services provision differ substantially between regions. Those areas having already relatively high levels of carbon sequestration have a comparative advantage in sequestering carbon. Opportunity costs of biodiversity are generally positively related with the level of biodiversity up to a turning point after which they are negatively related. To illustrate the policy consequences of the observed economies and diseconomies of scope we compare two management regimes to illustrate the potential gains from smart land management