THE WATER THAT QUENCHES THIRSTS in Queens and bubbles into bathtubs in Brooklyn begins about 125 miles north in a forest in the Catskill Mountains. It flows down distant hills through pastures and farmlands and eventually into giant aqueducts serving 9 million people with 1.3 billion gallons daily. Because it flows directly from the ground through reservoirs to the tap, this water—long regarded as the champagne of city drinking supplies—comes from what's often called the largest "unfiltered" system in the nation.

But that's not strictly true. Water percolating through the Catskills is filtered naturally—for free. Beneath the forest, fine roots and microorganisms break down contaminants. In streams, plants absorb nutrients from fertilizer and manure. And in meadows, wetlands filter nutrients while breaking down heavy metals.

New York City discovered how valuable these services were 15 years ago when a combination of unbridled development and failing septic systems in the Catskills began degrading the quality of the water that served Queens, Brooklyn and the other boroughs. By 1992, the U.S. Environmental Protection Agency (EPA) warned that unless water quality improved, it would require the city to build a filtration plant, estimated to cost between $6 and $8 billion and between $350 and $400 million a year to operate.

Instead, the city rolled the dice with nature in a historic experiment. Rather than building a filtration plant, officials decided to restore the health of the Catskills watershed, so it would do the job naturally.

What's this ecosystem worth to the city of New York? So far, $1.3 billion. That's what the city has committed to build sewage treatment plants upstate and to protect the watershed through a variety of incentive programs and land purchases. It's a lot of money. But it's a fraction of the cost of the filtration plant—a plant, city officials note, that wouldn't work as tirelessly or efficiently as nature.

"It was a stunning thing for the New York City council to think maybe we should invest in natural capital," says Stanford University researcher Gretchen Daily. Daily is one of a growing number of academics—some from economics, some from ecology—who are putting dollar figures on the services that ecosystems provide. She and other "ecological economists" look not only at nature's products—food, shelter, raw materials—but at benefits such as clean water, clean air, flood control and storm mitigation, irreplaceable services that have been taken for granted throughout history. "Much of Mother Nature's labor has enormous and obvious value, which has failed to win respect in the marketplace until recently," Daily writes in the book The New Economy of Nature: The Quest to Make Conservation Profitable.

Ecological economist Geoffrey Heal, a professor of public policy and business responsibility at Columbia University, became interested in the field as an economist who was concerned about the environment. "The idea of ecosystem services is an interesting framework for thinking why the environment matters," says Heal, author of Nature and the Marketplace: Capturing the Value of Ecosystem Services. "The traditional argument for environmental conservation had been essentially aesthetic or ethical. It was beautiful or a moral responsibility. But there are powerful economic reasons for keeping things intact as well."

Daily notes that beyond providing clean water, the Catskills ecosystem has value for its beauty, as wildlife habitat and for recreation, particularly trout fishing. Such values are not inconsequential. While no one has assessed the total worth of the watershed, even a partial look reveals that habitat and wildlife are powerful economic engines.

Restored habitat for trout and other game fish, for example, attracts fishermen, and angling is big business in this state. According to a report by the U.S. Fish and Wildlife Service (FWS), more than 1.5 million people fished in New York during 2001, yielding an economic benefit to the state of more than $2 billion and generating the equivalent of 17,468 full-time jobs and more than $164 million in state, federal, sales and motor fuel taxes. Though not as easily measured, individual Catskills species also have value. Beavers, for instance, create wetlands that are vital to filtering water and to biodiversity.

Ecological economists maintain that ecosystems are capital assets that, if managed well, provide a stream of benefits just as any investment does. The FWS report, for example, notes that 66 million Americans spent more than $38 billion in 2001 observing, feeding or photographing wildlife. Those expenditures resulted in more than a million jobs with total wages and salaries of $27.8 billion. The analysis found that birders alone spent an estimated $32 billion on wildlife watching that year, generating $85 billion of economic benefits. In Yellowstone National Park, the reintroduction of gray wolves that began in 1995 has already increased revenues in surrounding communities by $10 million a year, with total benefits projected to reach $23 million annually as more visitors come to catch a glimpse of these charismatic predators.

When it comes to water quality, EPA projects that the United States will have to spend $140 billion over the next 20 years to maintain minimum required standards for drinking water quality. No wonder, then, that 140 U.S. cities have studied using an approach similar to New York's. Under that agreement, finalized in 1997, the city promised to pay farmers, landowners and businesses that abided by restrictions designed to protect the watershed. (The city owns less than 8 percent of the land in the 2,000-square-mile watershed; the vast majority is in private hands.) "In the case of the Catskills, it was a matter of coming up with a way to reward the stewards of the natural asset for something they had been providing for free," Daily says. "As soon as they got paid even a little bit, they were much happier and inclined to go about their stewardship." There's no guarantee this experiment will work, of course; it may be another decade before the city finds out.

Elsewhere, other governing bodies are also recognizing the value of ecosystem services. The U.S. Army Corps of Engineers, for example, bought 8,500 acres of wetlands along Massachusetts' Charles River for flood control. The land cost $10 million, a tenth of the $100 million the Corps estimated it would take to build the dam and levee originally proposed. To fight floods in Napa, California, county officials spent $250 million to reconnect the Napa River to its historical floodplains, allowing the river to meander as it once did. The cost was a fraction of the estimated $1.6 billion that would have been needed to repair flood damage over the next century without the project. Within a year, notes Daily, flood insurance rates in the county dropped 20 percent and real estate prices rose 20 percent, thanks to the flood protection now promised by nature.

Even insects supply vital ecosystem services. More than 218,000 of the world's 250,000 flowering plants, including 70 percent of all species of food plants, rely on pollinators for reproduction—and more than 100,000 of these pollinators are invertebrates, including bees, moths, butterflies, beetles and flies. Another 1,000 or more vertebrate species, including birds, mammals and reptiles, also pollinate plants. According to University of Arizona entomologist Stephen Buchmann, author of The Forgotten Pollinators, one of every three bites of food we eat comes courtesy of a pollinator.

A Cornell University study estimated the value of pollination by honeybees in the United States alone at $14.6 billion in 2000. Yet honeybee populations are dropping everywhere, as much as 25 percent since 1990, according to one study. Now many farms and orchards are paying to have the bees shipped in.

Today's interest in assigning dollar values to pollination and other ecosystem services was spawned by publication of a controversial 1997 report in Nature that estimated the total global contribution of ecosystems to be $33 trillion or more each year—roughly double the combined gross national product of all countries in the world. The study became a lightning rod. Detractors scoffed at the idea that one could put a dollar value on something people weren't willing to purchase. One report by researchers at the University of Maryland, Bowden College and Duke University called the estimate "absurd," noting that if taken literally, the figure suggests that a family earning $30,000 annually would pay $40,000 annually for ecosystem protection.

Other researchers, including Daily and Heal, charged that the $33 trillion figure greatly underestimates nature's value. "If you believe, as I do, that ecosystem services are necessary for human survival, they're invaluable really," Heal says. "We would pay anything we could pay."

Daily doesn't believe the absolute value of an ecosystem can ever be measured. Heal agrees, yet both scientists say that pricing ecosystem services is an important tool for making decisions about nature—and for making the case for conservation. "Valuation is just one step in the broader politics of decision making," she says. "We need to be creative and innovative in changing social institutions so we are aligning economic forces with conservation."

Indeed, as dollar values for nature's services become available, environmentalists increasingly use them to bolster arguments for conservation. One high-profile example is the contentious dispute over whether to tear down four dams on the lower Snake River in southeastern Washington to restore salmon habitat, and thus the region's lucrative salmon fishery. Ed Whitelaw, a professor of economics at the University of Oregon, notes that estimates of the economic impact of breaching the dams range from $300 million in net costs to $1.3 billion in net benefits, largely due to the wide range of projections about recreational spending.

A 2002 report by the respected, nonprofit think-tank RAND Corporation concluded the dams could be breached without hurting economic growth and employment. Energy lost as a result of the breaches could be replaced with more efficient sources, including natural gas, resulting in 15,000 new jobs. Further, the report noted that recreation, retail, restaurants and real estate would experience a marked growth. Recreational activities alone would increase by an estimated $230 million over 20 years.

There's no question that returning the salmon runs would have a major impact on the region. When favorable ocean conditions increased the runs in 2001, Idaho's Department of Fish and Game estimated the salmon season that year alone generated more than $90 million of revenue in the state, most of it in rural communities that badly needed the funds.

"Some people think it sounds crass to put a price tag on something that's invaluable, careening down the slippery slope of the market economy," says Daily. "In fact, the idea is to do something elegant but tricky: to finesse the economic system, the system that drives so much of our individual and collective behavior, so that without even thinking it makes natural sense to invest in and protect our natural assets, our ecosystem capital."

What Daily and other ecological economists want is to insinuate consideration of ecosystem services into daily decision making, whether it takes the form of financial incentive or penalty. "At a practical level, decisions are made at the margin, not at the 'should we sterilize the Earth' level," she says. "It's in all the little decisions—whether to farm here or leave a few trees, whether to build the shopping mall there or leave the wetland, whether to buy an SUV or a Prius—that ecosystem service values need to be incorporated."

Heal agrees. "Although ecosystem services have been with us for millennia," he says, "the scale of human activity is now sufficiently great that we can no longer take their continuation for granted."

Virginia journalist Jim Morrison wrote about polar bears and global warming in the February/March 2004 issue.