218 – Valuing environmental intangibles, part 1: The options

The idea of putting dollar values on intangible environmental benefits seems to polarise people. At one end of the spectrum, some believe it’s of critical importance – seemingly the most important thing environmental economists can do. At the other end, some feel that it’s a waste of time, or even morally repugnant. Over several Pannell Discussions, I’m going to explore the arguments behind this range of views.

Some people from outside environmental economics seem to assume that what we mainly do is put dollar values on environmental benefits. In fact our work covers a wide range of issues and research methods, of which research to value environmental intangibles (which we call “non-market valuation”) is a relatively small part.

“Small, but important and under-resourced”, some argue, including some economists and some non-economists.

“Irrelevant and over-resourced”, others argue, again including some economists and some non-economists.

Of course, the reality is complex, and not so black and white, so let’s look at the black, the white and the shades of grey.

Before I get to that, I’ll briefly outline the four main non-market valuation methods. I need to do this because they have different strengths and weaknesses.

Two of the methods are based on observing people’s behaviour. Environmental values are inferred from what people actually pay, or the amount of time and resources they actually commit, to secure an environmental benefit.

The “travel-cost method” examines how much people pay (in time, petrol, vehicle depreciation, etc.) to travel to particular environmental assets. (It’s more complicated than that sounds. I’m not going to go into details.) For example, this method has been used to value lakes (Fleming and Cook, 2007) or art exhibitions (Vincente and de Frutos, 2011). Clearly, this is only useful to get values for the types of environmental assets that people go to visit, and even for those assets it only captures the values that are generated by visiting. The more intangible benefits, like “existence values”, are not captured. Still, travel cost values provide a lower-bound value, which may be useful.

“Hedonic pricing” is often used to unpack the different values associated with land and property. Data for many property sales, with different characteristics, are collected. Some properties that are sold have positive environmental characteristics (e.g. they are near to a river) while others don’t. Statistical methods are used to tease out how much people actually pay for the environmental characteristics (e.g. Hamilton, 2005). Again this is only useful for a subset of environmental values – those that can be enjoyed as a result of buying land or property.

The other two methods are based on surveys.

“Contingent valuation” is the most widely applied of any of the four (e.g. Epstein, 2003). There are various flavours of contingent valuation, but they all involve people responding to hypothetical questions about their willingness to pay for environmental benefits, or the compensation they would require in order to be willing to tolerate adverse environmental changes. For example, one version asks people whether they would be willing to pay at least $X for a particular environmental change. You vary X for different people, and ask lots of people the same questions, generating a distribution of values.

The other survey-based approach is called “choice experiments” (Hoyos Ramos, 2010; Gillespie and Kragt, 2012). That could be a bit confusing for scientists, because it doesn’t actually involve experiments in the physical sense, just hypothetical ones. People are offered sets of options and asked to choose the one they prefer. The options include various levels of environmental benefits, and usually include different costs of obtaining those benefits. If you design it well, and ask enough people, you can again use statistics to infer the dollar values that people assign to the environmental assets in question.

So far I’ve tried to say as little as possible about the positives and negatives of these methods. We’ll look at the positives next time.

References

Epstein, R. (2003). The regrettable necessity of contingent valuation, Journal of Cultural Economics 27(3), 259-274. Downloadable at IDEAS.

Fleming, C.M. and Cook, A. (2007). The recreational value of Lake McKenzie: An application of the travel cost method, Australian Agricultural and Resource Economics Society, 51st Annual Conference, February 13-16, 2007, Queenstown, New Zealand. Downloadable at IDEAS.

Gillespie, R. and Kragt, M.E. (2012). Accounting for nonmarket impacts in a benefit-cost analysis of underground coal mining in New South Wales, Australia, Journal of Benefit-Cost Analysis 3(2): article 4. Downloadable at IDEAS.

Hamilton, J.M. (2005). Coastal landscape and the hedonic price of accommodation, Sustainability and Global Change Research Unit, Hamburg University, Working Paper FNU-91. Downloadable at IDEAS.

Hoyos Ramos, D. (2010). Using discrete choice experiments for environmental valuation, Universidad del País Vasco – Departamento de Economía Aplicada III (Econometría y Estadística), BILTOKI number 2010-03. Downloadable at IDEAS.

Vincente, E. and de Frutos, P. (2011). Application of the travel cost method to estimate the economic value of cultural goods: Blockbuster art exhibitions, Hacienda Pública Española / Revista de Economía Pública, 196(1), 37-63. Downloadable at IDEAS.

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