TEEB Training Session 2: Valuation methods 1 ©TEEB.

The Economics of Ecosystems & BiodiversityThe Economics of Ecosystems & Biodiversity

TEEB Training

Session 2:Valuation methods 1

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Approaches to Valuing Ecosystem Services

Direct market valuation approaches: use data from actual markets

Revealed preference approaches: economic agents “reveal” their preferences through their choices

Stated preferences approaches: simulated markets where values are sought for changes in provision or policy

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Direct market valuation: Market-based

Market price based approaches– Most often used to obtain values for provisioning services

– Preferences and marginal cost of production are reflected in market price

– In well functioning markets, price provides accurate information on value

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Direct market valuation: Cost-based

Cost based approaches– Costs incurred in recreating an ecosystem service

artificially Avoided cost method Replacement cost method Mitigation or restoration cost

Appropriate for regulating services

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Direct market valuation: Production function

Production function approaches– Estimates contribution of an ecosystem service to a final

commodity

– Improvement in resource base or environmental quality, i.e. enhanced ecosystem services, lowers costs and prices or increases quantity of goods

– Requires knowledge of relationships between ecosystems services and valued end points

Applicable to regulating and supporting services

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Direct market valuation: limitations

Lack of markets for ecosystem servicesMarkets are distortedReplacement cost approach can overstate valuesProduction function approaches have specific problems:

– Lack of data/knowledge of cause-effect relationships

– Interactions across ecosystem services increases likelihood of double counting

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Revealed preference

RP methods are based on observations of individual choices related to an ecosystem service

Appropriate for direct and indirect use goodsStages

1. Determine existence of surrogate market for ecosystem service

2. Select appropriate RP method

3. Collect market data to estimate demand function

4. Infer value of change in quantity/quality from demand function

5. Aggregate values

6. Discount values where appropriate


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Revealed preference: Travel Cost Method

Travel cost method (TCM)– The value of an environmental good is reflected in the time and

money people spend getting to it e.g. forests, mountains, fishing sites

– Based on actual behaviour, mostly used for recreation studies– Visitor surveys are used to determine distance travelled to site,

values are estimated from cost per mile or per hour spent travelling

– Travel costs are used to estimate the number of visits made– Only direct use values are estimated

Appropriate for cultural services


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Revealed preference: Travel Cost Method cont…

TCM practical issues– Functional form– Multipurpose trips:

• ‘Meanderers’ may visit several sites during a trip• ‘Purposeful visitors’ visit only one site

– Holidaymakers and residents:• Holidaymakers may have high overall costs but low site visit costs• Residents have lower travel costs, but may in fact value the site

highly• Some form of weighting required to account for these

– What costs to include?• Total cost of travel, marginal cost of visit, value to time


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Travel cost method: example

Nam and Son (1991)– Recreational value of the

Hon Mun Islands Vietnam

– Marine Protected Area established in 2001 with US$2m funding over 4 years

– Proposal to expand port at Nha Trang City with impacts on water quality and marine ecosystems

Source: Google Maps


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Both domestic and foreign visitors to Hon Mun were surveyed and zonal TCMs estimated– 10 domestic zones, 3 international zones– In 2000 there were 397,000 domestic and 118,700

foreign visitors


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TCM value estimates (1US$ = 14,500VND)

Consumers surplus Price paid Recreational value All

Visitors (US$m)

Per Visitor(US$)

All Visitors (US$m)

Per Visitor(US$)

All Visitors (US$m)

Per Visitor(US$)

Domestic visitors

1.49 8.96 2.46 15.16 3.95 22.74

Foreign visitors

1.64 17.22 31 129.53 13.95 146.76

Total 3.13 14.77 17.90


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Revealed preference: Hedonic pricing

Hedonic pricing (HP)– The value of a good is a function of its characteristics, e.g.

house prices (or rents) are determined by a number of attributes:

• Structural: number of rooms, garden size, garage size, central heating, double glazing…

• Socio-economic: quality of schools, unemployment rate, local taxes…

• Local amenities: access to services, transport links, environmental quality…


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Revealed preference: Hedonic pricing

HP practical issues– Values of those not in property market

– Large amounts of data are required to determine the values of individual attributes, and needs active market

– Omitted variable bias: important explanatory variables may be missing from data

– Housing markets tend to be segmented, i.e. several hedonic models may have to be estimated

– Variables may be correlated, e.g. houses near quarries suffer from both noise and dust

– Hedonic models often have very complex functional forms


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Hedonic Pricing: example

UK Defra study on effects of proximity to landfill sites on house prices http://archive.defra.gov.uk/environment/waste/strategy/legislation/landfill/documents/landfill_disamenity.pdf


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Types of disamenity from landfill:– noise, dust, litter, odour, vermin, visual intrusion, perception of

risk Housing variables used:

– bedrooms– bathrooms– type of house (8 classes)– car parking space, single garage, double garage – partial central heating, full central heating– floor area– age (5 classes)


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Used a GIS database of 592,000 mortgage transactions– contained data on house values, characteristics, location– 1990 to 2000 period– 11,300 landfill sites - 6,100 operational

Models estimated separately for counties (sub-regions) to account for differing property markets

Hedonic model captured 80% of the variation in house prices, variables had “right” signs


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Average reduction in house prices of £5,500 within 0.25 miles of landfill and £1,600 between 0.25 and 0.5 miles

Average total UK disamenity = £2,483mBetween £334,350 and £478,990 per landfill siteBetween £1.52 and £2.18 per tonne of waste


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How are these results used?– Inform landfill tax levels - initially £15/tonne for active

waste

– Inform planning decisions

– Feed into CBA on landfill siting decisions• mitigation actions

• financial costs of alternative sites

– Potential for compensation?• Some evidence of reduction in dis-amenity effects over time


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Revealed preference: limitations

Market imperfections and policy failuresLarge, good quality data sets requiredExpensive and time consumingOmits non-use valuesSensitive to assumptions made on relationship between

ecosystem service and surrogate market


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Stated preference

SP approaches use simulated markets to elicit willingness to pay (WTP) or accept (WTA) values for changes in ecosystem service provision

Appropriate for both use and non-use values– May be difficult to segregate these value motives from

WTP Survey based methods in which respondents are

presented with a hypothetical market describing the change in service provision


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Stated preference Summary on methods covered

Contingent valuation method One policy-on scenario compared with Business As Usual

(BAU)

Choice Experiments Attributes are compared, e.g. ‘visibility in the sea’ Some baseline BAU level for each attribute and this is

compared with varying levels (with policy-on) Group valuation

Less commonly applied – links valuation with deliberative methods


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Stated preference: Contingent valuation

Contingent valuation method (CVM)A hypothetical market is described in which respondents

either buy (WTP) or sell (WTA) a specified level of an environmental good or service

The values which are elicited are “contingent” on the hypothetical market with which respondents are presented


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Stated preference: Contingent valuation cont…

Large differences between WTP and WTA for the same good, neoclassical economic theory suggests they should be near equal– Loss aversion and implied property rights - ownership

makes a commodity more valuable

– Absence of substitutes

– Irreversibility

– Income and budget constraints


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Stated preference: CVM process I

Survey design

– Start with focus groups and consultations with stakeholders

– Decide the nature of the market

– Determine the quantity and quality of information provided for the good

– Set allocation of property rights WTP or WTA

– Determine credible scenario and payment vehicle (tax, donation, price).

– Choose elicitation method (e.g. dichotomous choice vs. open-ended elicitation method).


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Stated preference: CVM process II

Survey implementation and sampling– Interview implementation: face-to-face, mail, telephone,

internet, groups

– Interviewers: private companies, researchers

– Sampling: convenience sample, representative and stratified sample


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Stated preference: CVM process III

Calculate measures of welfare change– Open-ended – simple mean or trimmed mean (with outliers

removed )

– Payment cards/ladders

– Bidding games

– Dichotomous choice – estimate expected value of WTP or WTA


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Stated preference: CVM process IV

Technical validation– Estimating a bid function

– Testing the validity and reliability of the estimates produced


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Stated preference: CVM process V

Aggregation and discounting– Calculating total WTP from mean/median WTP over

relevant population – for example by multiplying the sample mean WTP of visitors to a site by the total number of visitors per annum.

– Discount calculated values as appropriate.


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Stated preference: CVM example

1989 Exxon Valdez spilt 11 million gallons of oil in Prince William Sound, Alaska.

CVM study was carried out to estimate passive use value (existence, bequest) loss to US citizens.

WTP values sought for policies to prevent similar spills in future.

WTA would have been correct measure.Estimated total loss was $2.81bn


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Contingent valuation method: example

• Bann (1999)– Survey of 300

households’ WTP for mangrove protection in Benut, Malaysia (243 useable responses)

Source: Google Maps


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Contingent valuation method: example

56% of respondents stated a positive WTP, of those who didn’t 49% gave protest responses, meaning that

Payment ladder and dichotomous choice elicitation methods were used– The payment ladder asked respondents to tick values

they would pay and cross values they wouldn’t

Mean US$18 US$61

Median US$10 US$30


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Stated preference: Choice modelling

Choice modelling (CM)– Also referred to as choice experiments (CE)

– Type of conjoint analysis

– Survey respondents make choices across environmental goods with varying bundles of attributes

– Trade-offs between attributes reveals their values

– Can combine qualitative and quantitative attributes


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Stated preference: Choice modelling

CM issues:– Requires specialist statistical design (and software) and

sampling resources

– Choice tasks can be complex

– Potentially complex analytical task

– Inclusion of socio-economic and attitudinal variables is not straightforward


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Choice Modelling: exampleValuing quality changes in Caribbean coastal waters for

heterogeneous beach visitors (Beharry-Borg and Scarpa, 2010)Most locals do not snorkel or dive. In order to ensure that the

valuation captured both locals and non locals two groups were Identified snorkelers and non snorkelers.

Most valuation studies in the Caribbean have focussed on obtaining WTP values for attributes associated with snorkelling and scuba diving

There were 9 attributes in the snorkeler subsample and 6 in the non snorkeler subsample plus a cost attribute

Cost was described in terms of a contribution cost to an NGO


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Choice Modelling: example

1. Number of boats near the coastline

2. Presence of a marine protected area

3. Level of coastline development

4. Average bathing water quality

5. Level of vertical visibility

6. Number of plastics per 30m

7. Contribution fee

8. Number of snorkelers per group

9. Level of coral cover

10. Number of fish seen while snorkelling

Attributes

Snorkelers

Non-snorkelers


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No Policy High Policy Low Policy


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• 198 (snorkellers) and 86 (non-snorkellers) = 284 respondents



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Individual-specific WTP estimates (TT$ ~ 0.16US$) for snorkelers

Class one (61%) Class two (39%)

Up to 60 fishes 35 5

Up to 45 % coral cover 50 10

Vertical visibility of up to 10 m 40 10

Marine Protected Area which allows fishing 33 7

Marine Protected Area which prohibits fishing 34 10

Plastics of up to 5 pieces 15 50

Low chance of ear infection 22 25

Low level of development 15 40

1TT$ ~ 0.16US$


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Stated preference: Group valuation

Group valuation– Combination of stated preference techniques with

deliberative techniques– Offer a deeper exploration of environmental

information, values and preference formation– Trade-off of smaller groups versus survey

approaches versus more precise values


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Stated Preference: Limitations

Sometimes the only way to capture non-use values Hypothetical nature of the markets: do the decisions correctly

reflect real-life behaviour? Divergence between WTP and WTA estimates (theoretically

equal) Insensitivity to scope and scale Are the different values comparable to a common metric? Goods are complex – is there a need for pre-valuation

workshops so that respondents can better understand their preferences?


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Comparisons between approaches: Market-based

Advantages Disadvantages

Market prices •Reflect private WTP•Construct financial accounts•Easy to obtain

•Market imperfections and policy failures distort prices•Seasonal variations•Currency variations

Shadow prices

•Reflect true economic value or opportunity cost to society

•Complex to derive•Require substantial data•Considered ‘artificial’

Production function

•Links ecosystem functions to market values

•Requires modelling of dose response relationships•Complex for multi-use systems•Potential double counting


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Comparisons between approach - cost-based


Mitigation/restoration costs

•Useful when valuing particular ecosystem functions

•Diminishing returns and difficulty in restoring functions

Replacement costs

•Estimates indirect benefits when ecological data not available for estimating damage functions

•Net benefits of replacement may exceed original function•May overstate WTP

Avoided damage cost

•Precautionary principle applied •Data or resource limitations may rule out first-best valuation methods


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Comparisons between approach - Revealed and stated preference


Hedonic pricing •Reflects private WTP•Based on observed behaviour

•Data intensive •Requires defined surrogate market

Travel cost •WTP for recreational sites•Based on observed behaviour

•Data intensive•Restrictive assumptions about behaviour•Sensitive to statistical methods

Contingent valuation

•Can measure non-use value and give estimate of TEV

•Sensitive to biases in survey design and implementation

Choice modelling

•Simultaneously elicits values for a range of goods and services

•Complex statistical design and analysis•Potential burden on respondents – choice heuristics


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What do the methods capture?TEV and valuation methods

Use values Non-use values

Direct Indirect BequestExistenceOption

Market

Production Function

Revealed Preference

Stated Preference

Confidence?

Confidence?

Value?

Value?


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Session Summary

Different methods available but variability in terms of:– Data needs

– Categories of TEV valued

– Confidence in value outcomes

Those that rely on market prices (or surrogates/ proxies) tend to only value a sub-set of ecosystem services


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Group exercise

Returning to the gaps on value information you identified earlier, can you suggest which valuation methods might be appropriate to address the gaps?

Do any gaps remain?

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