Environmental Valuation Techniques:A Review

Submitted To

Dr. Sandeep Srivastava

Civil Dept.

Submitted By

Abhigyan Anand

2013PCD5317

Environmental Valuation

It refers to the assignment of money values to non-marketedassets, goods and services, where the money values have aparticular and precise meaning.

Non-marketed goods and services refer to those which maynot be directly bought and sold in the market place.

Examples are scenic views, coral reefs, mountain vistas,biodiversity.

Accident prevention would be an example of a service whichis sometimes marketed (purchase of safety equipment) andsometimes not (good driving behavior).

If a good or service contributes positively to humanwellbeing, it has economic value.

An individual’s wellbeing is determined by whether or not itsatisfies that individual’s preferences.

Preferences are revealed in many ways, but the context ofinterest is the market.

Environmental values are measured in money terms throughthe concept of individuals willingness to pay (WTP) orwillingness to accept (WTA) compensation for alterations inenvironmental conditions.

WTP measured by the maximum amount of money that thatperson would be willing to pay in return for receiving thebenefit.

WTA is measured by the minimum amount of money thatthat person would be willing to accept as compensation forincurring the cost.

Total economic value (TEV), which explicitly recognizes that the economic value of a good or service is composed of different parts—some of which are tangible and directly used; some of which are intangible or very remote. Diagram shows TEV

Total Economic Value = Total User Value + Total Non-useValue

Different Techniques

Hedonic pricing

Travel cost method (TCM)

Contingent valuation method (CVM)

Production Factor Method

Averting Behavior Method

Hedonic pricing Method

• The hedonic pricing method infers the value ofenvironmental features from the prices of traded goods.

• It is applicable in those cases where the prices of a good isdirectly influenced by environmental factors.

• Example is the housing market, where the value of twocomparable properties or apartments will differ depending onthe environmental amenities in the vicinity of each site.

• Hazardous waste site leads to a measurable drop in theproperty price (compared to equivalent houses in otherlocations),

• This difference in prices gives an indication of the externalcost of the waste site.

Hedonic pricing can also be applied to the valuation ofexternal benefits.

HPM has a very large data requirement because both primarydata (characteristics of the surroundings) and secondary data(market transactions) need to be collected.

The value of a house or wage depends on many factors: thereare social factors, such as employment opportunities, taxesand accessibility.

Data need to be gathered for all these factors.

This makes HPM less suited for application in a decisionsupport tool.

Travel Cost Method

The travel cost method is well suited for placing a value onnatural resources, amenities, natural parks, hunting, fishing,and wildlife watching sites, and cultural heritage sites.

It is based on the concept that if people travel to a site, thentheir willingness to pay for visiting this site must be at leastas large as the travel cost incurred.

The travel cost is comprised of the out−of−pocketexpenditures incurred to travel to and at the site, plus theopportunity cost of time.

It is also useful for estimating time costs and their impact onthe choice of transport mode.

The problem with this method is that it does not take intoaccount multi-purpose travel (i.e. that individuals will visitmultiple sites on a single trip).

Contingent Valuation Method

The contingent valuation method is a direct approach using ahypothetical market.

CVM is a survey method in which respondents are asked howmuch they are willing to pay for the use or conservation ofnatural goods.

It is the only environmental valuation technique that takesinto account non-use values .

However, using this method can lead to potential biases(values can be under or over estimated).

There are also high costs involved as it is expensive tointerview people individually.

Essential elements of the survey are:

description of the natural good that is to be valued : includes identifying all valuable attributes of the good

description of the payment vehicle: how the money will be paid

description of the hypothetical market : include an identification of who will provide and who will pay for the nature improvement

It is said to be an appropriate economic valuation method for environmental goods that have no indirect effects on other goods.

It is therefore suited for the valuation of amenities or but not for the valuation of natural processes, such as climate regulation .

Production Factor Method(PFM)

PFM is based on the fact that many natural resources,processes and qualities are used as production factors.

Improvement of natural quality may lead to a reduction ofproduction costs for the sector making use of the relevantquality.

The PFM tries to value natural qualities by valuing theirimpacts on production costs.

The PFM has been applied to value the effects of waterquality on agriculture, fishery and industry and the effects ofair quality on buildings, crops and livestock.

The method is meant to determine the value of changes innatural qualities on the economic production system.

The method consists of two steps:

First, the relation between a dose of pollution and an effecton production (the response) is determined.

Secondly, the response must be translated into economicterms. This is can be done by means of the previouslydescribed valuation methods (de Boer et al., 1997) andconsequently the PFM is not really a separate valuationmethod.

The valuation part of PFM is mostly done by simply multiplyingthe quantity change by the market price.

It would, however, be better to investigate all economic effects,such as changes in demand and supply and in prices.

PFM can only produce cost-based estimates of the value of theproduction capacity of nature

Averting Behavior Method(ABM)

ABM is especially suited for valuing natural qualities.

This is done by looking at expenditures made to avert ormitigate negative effects from the reduction of a naturalquality.

ABM relies on the assumption that people perceive thenegative effects of environmental deterioration on theirwelfare and that they are able to adapt their behavior to avertor reduce these effects.

This means, that people experience the negative effects ofozone depletion and that they will buy products such as hatsand sun-cream to prevent damage to their health.

The willingness to pay for a clean environment is deductedfrom people’s purchases of products and services to avert thenegative effects of pollution.

ABM is a cost-based method, since the costs of purchasingthese items are used to value environmental qualities, eventhough the social preferences for a healthy environment maybe much greater than the expenditures on these products.

Buying such products actually means that they have lessmoney to spend on the environment .

people may not react to small changes in environmentalquality. They may only react when a certain threshold hasbeen passed.

Summery of Economic Valuation Techniques

Case Study Cheimaditida wetland

Several lakes in Greece were drained to generatehydroelectric power or to expand agricultural land, resultingin biodiversity loss.

Greece lost 63% of its wetlands between 1920 and 1991(Barbier et al.,1997).

The aim of this case study is to estimate the non-use values ofthe Cheimaditida wetland in Greece using the CVM which isone of only two valuation techniques able to estimate non-use values of environmental resources.

These non-use values can be combined with use values of theCheimaditida wetland (Psychoudakis et al., 2005 forestimates) to obtain its TEV which can then be used for CBA ofmanagement strategies for this wetland.

The main economic activities in the area are irrigation andfertilizer-intensive agriculture and fishing.

Both are adversely affecting water quantity and quality ofthe wetland, thereby reducing its ability to maintainbiodiversity and other life support functions (Seferlis, 2004).

Methodology:

The purpose of this study is to elicit the non-use valuesassociated with the wetland .

In this study, respondents were asked to state their valuation(WTP) for an improvement in the quantity and quality of theenvironment.

• These are the four characteristics, expected to generate non-use values, were selected in this study: These were (a)biodiversity, (b) open water surface area, (c) inherentresearch and educational values that can be extracted fromthe wetland and (d) values associated with environmentallyfriendly employment opportunities.

The majority of the non-use values associated with wetlands that were estimated were attributed to biodiversity.

Using these characteristics, and after extensive consultations withscientific experts, the Greek Biotope and Wetland Centre, acurrent scenario and two management scenarios were designed:

Scenario A: no management

decline in population and size of habitats:-10%

declines in Open water surface :-3–10%

Scenario B: managing the wetland to maintain current conditions

Population and size of habitats:-current level

Open water surface :-20%

Scenario C: managing the wetland to improve current conditions

Increase in Biodiversity by:-10%

Open water surface increase by :-60%

Due to limited time and resources, an open-ended approach wasused to elicit WTP values for the two different wetlandmanagement scenarios.

An open-ended (OE) elicitation format asks the respondent“How much are you willing to pay to…”, rather than a close-ended format which asks “Are you willing to pay €X to…”.

The respondents were asked whether they are WTP to movefrom scenario A to B and if yes, to state their maximum WTP.

Similarly the respondents were asked whether or not they areWTP to move from scenario A to C and if yes, to state theirmaximum WTP.

While stating their WTP values the respondents were remindedof their budget constraints, household expenses, as well asother substitute sites in Greece.

Result is shown in next slides

Means and standard deviations (in parenthesis) of respondent characteristics by group

Conclusion

The results from the valuation model reveal that those whovisited the wetland and those with higher incomes were morelikely to attach higher values to the non-use values of thewetland.

The fact that there was sample selection bias for the firstimprovement scenario (A to B) and no such bias for the secondimprovement scenario (A to C)

It suggests that the sample in the first scenario failed to berepresentative of the whole population whereas the sample forthe second improvement scenario was representative of thewhole population.

Thus, the Greek public would prefer a greater improvement inmanagement of the wetland to a smaller one.

Overall, the results of this contingent valuation case studyindicate that the Greek public attaches positive and significantnon-use values to the Cheimaditida wetland.

These results assert that CVM can produce valid nonmarketestimates of non-use value.

These non-use values can be combined with direct and indirectuse values of the Cheimaditida wetland to estimate its TEV,which can provide policy makers with the necessary economicinformation to carry out a CBA, and thus to ensure thesustainable and efficient management of the Cheimaditidawetland.

References

Birol et al. ..“Using economic valuation techniques to inform water resources management: A survey and critical appraisal of available techniques and an application” 2006.

Bishop et al..” Assessing the Economic Value of Ecosystem Conservation” 2004.

Dixon et al.” Environmental Valuation: Challenges and Practices” 2008.

Dosi et al.” Environmental Values, Valuation Methods, And Natural Disaster Damage Assessment” 2000.

Eastwood et al..” Generalisability in economic evaluation studies in healthcare: a review and case studies” 2004.

The Economic, Social and Ecological Value of Ecosystem Services: A Literature Review 2005.

Venkatachalam et al.“The contingent valuation method: a review” 2003.

Zdemiroglu et al..”Economic Valuation with Stated Preference Techniques” 2002.

Thanks