Environmental Valuation

HS 419Lecture 10

Environmental valuation methods

• Environmental Valuation is concerned with the analysis of methods for obtaining empirical estimates of environmental values, such as the benefits of improved river water quality, or the cost of losing an area of wilderness to development.

• The most commonly used approach is based on the concept of Total Economic Value (TEV).

Environmental Valuation

• The Total Economic Value is generally decomposed into three categories of value:– (1) direct use value; (2) indirect use value; and (3)

non-use value. • The former two categories are sometimes

collectively referred to as “use value”.

Environmental Values• The Direct use value is derived from goods, which can be extracted,

consumed or directly enjoyed. It is also known as extractive or consumptive use value.

• Indirect use value is referred to as non-extractive use value, derived from the services that an environmental resource provides.

• Non-use values are defined as those benefits or welfare gains/losses to individuals that arise from environmental changes independently of any direct or indirect use of the environment. – This category can be further subdivided into (1) option value and (2)

existence value.

Environmental Values

• Option value - is the assessment of value attached to an option that would be available in the future. For example, once biodiversity is lost at the expense of development, the possibility (option) of benefiting from it is gone forever.

• Existence value can be defined in various ways. Most definitions however contain two main components: (1) pure existence values and (2) bequest values.

Environmental Values

• Pure Existence Value - the very existence of environmental assets are valuable. These values are intrinsic in nature

• Bequest value - our desire to preserve the environment for relatives and friends, and also for all other people living today and future generations, so that they may benefit from conservation of the environment

Environmental Valuation Methods

• Total Economic Value = Direct and Indirect Use Values + Option Values + Existence Values

Types of environmental valuation techniques

• Environmental valuation techniques can be broadly classified into two categories: revealed preference (RP) approaches and stated (or expressed) preference (SP) approaches.

• Revealed preference approaches make use of individuals' behaviour in actual or simulated markets to infer the value of an environmental good or service.

• RP - for example, the value of a wilderness area may be inferred by expenditures that recreationists incur to travel to the area.

• Stated preference methods attempt to elicit environmental values directly from respondents using survey techniques.

Environmental Valuation Techniques

Environmental Valuation Techniques

• ‘Revealed’ preference approaches.• Observes actions within surrogate markets (travel, house prices)

taken in response to environmental change.• Largely restricted to ‘use’ values• Examples: Travel Cost Method, Hedonic Price Method.

• Stated preference approaches.• Attempts to elicit preferences by experiments or questionnaires• Examples: Contingent Valuation Method, Choice experiments.

Revealed Preference Approaches

Market Based

• place monetary values on goods and services.• reveal their preferences through the choices

they make in allocating scarce resources among competing alternatives

• an individual's willingness to pay to acquire or preserve environmental services

Types of Market based

• factor of production– direct value as a factor of production and the impact of

environmental degradation – For example, a decline in water quality could have a

direct and detrimental impact on the productivity and health of shellfish beds

• limitations – it is limited to those resources that are used in the

production process of goods and services sold in markets

Types of Market based

• Producer’s / Consumer’s surplus– consumer surplus is the difference between what

each customer is willing to pay and the price of the good or service

– producer surplus is the difference between what a producer is paid for a good or service and what it costs to supply

Types of Market based

• Defensive expenditure – made on the part of industry and the public either

to prevent or counteract the adverse effects of pollution or other environmental stressors

– monetizes an environmental externality by measuring the resources expended to avoid its negative impacts on a surrounding community.

– Types of defensive expenditures include water purification devices, beach nourishment, aforestation and lake restoration etc.

Surrogate Market Methods

• In the absence of clearly defined markets, the value of environmental resources can be derived from information acquired through surrogate markets.

• The most common markets used as surrogates when monetizing environmental resources are those for property and labor.

Types of surrogate Markets

• hedonic price method – uses surrogate markets for placing a value on

environmental quality– air, water, and noise pollution have a direct impact

on property – examining the price of a property over time as

environmental conditions change and correcting for all non-environmental factors values.

Types of surrogate Markets

• travel cost method – measure the value of a recreational site by surveying

travelers on the economic costs they incur (e.g., time and out-of-pocket travel expenses) when visiting the site from some distance away.

– an indicator of society's willingness to pay for access to the recreational benefits provided by the site.

• Limitations– is limited in application and captures only direct

recreational benefits and only when there are measurable travel costs to examine.

Stated Preferences

Non-Market Methods

• Contingent Valuation Method (CVM)– non-market-based technique that elicits information concerning

environmental preferences from individuals through the use of surveys, questionnaires, and interviews.

– The questionnaire may take the form of a simple open-ended question (e.g., how much would you be willing to pay) or may involve a bidding process (e.g., would you accept Rs.100, would you accept Rs.200) or take-it-or-leave-it propositions.

– Based on survey responses, examiners estimate the mean and median willingness to pay for an environmental improvement or willingness to accept compensation for a decline in environmental quality.

– CVM and other non-market methods are required accurately to capture non-use value

Non-Market Methods

• Limitations– may not yield accurate results due to biases that

may be introduced in the survey or through respondents' behavior.

– These biases include strategic bias, where the respondent's belief that his answers may be used to affect government policy, leads him to intentionally understate or overstate his willingness to pay to achieve the desired policy result.

Non-Market Methods

• choice experiments respondents are presented with a menu of alternatives relative to environmental policy options, such that preferences for various components or attributes can be examined at a more refined level.

• For example - various options for supplying water necessary to meet the demands of the area's growing population, while focusing attention on resultant environmental costs

Market price Environment evaluation

Commercial value from the consumption at present (e.g. price of a tree in the market)

X X

Commercial value from the consumption in the future (e.g. price of the tree in the future)

X X

Non-commercial value (e.g. benefit gained by having a tree in certain place)

X

What is the value of "environment"?

Non Use Value

Cost–benefit analysis

• an analysis of the cost effectiveness of different alternatives in order to see whether the benefits outweigh the costs.

• The aim is to gauge the efficiency of the intervention relative to the status quo.

• The costs and benefits of the impacts of an intervention are evaluated in terms of the public's willingness to pay for them (benefits) or willingness to pay to avoid them (costs).

• The guiding principle is to list all parties affected by an intervention and place a monetary value of the effect it has on their welfare as it would be valued by them.