Rethinking the use of the residual value method for ecosystem services valuation

A critical component of ecosystem accounts is the monetary value of ecosystem services. This requires the estimation of an exchange value for the ecosystem services, which represents the value the ecosystem service would receive if a market for the service existed. The UN System of Environmental-Economic Accounting – Ecosystem Accounting (SEEA EA) endorses a range of different approaches for deriving estimates of the exchange value of the ecosystem services. One such approach that has been widely adopted is to derive an estimate of resource rent based on the “residual value method”. This assumes that resource rent – a measure of the value of the ecosystem input into production – is equivalent to the residual value after all costs (including normal returns to manufactured capital) have been deducted from revenue. Several issues exist with this approach, foremost being that it does not explicitly consider the ecosystem service to be an input into the production process, and in some applications, has resulted in negative estimates of the value of the ecosystem service. In this paper, we highlight the issues around the use of the residual value method, and propose that it is not an appropriate method for use in estimating exchange prices for ecosystem services for use in ecosystem accounts. Instead, we suggest that exchange values for ecosystem services be based on one of the other SEEA EA endorsed approaches.