Monthly Archives: July 2012

221 – Valuing environmental intangibles, part 4: The upshot

In Part 2 I argued that information about environmental values is essential for making good decisions about how to spend the money in environmental programs. In Part 3 I discussed some of the criticisms that have been made of the main survey-based methods that economists use for this purpose. Part 4  is the “so what” part: considering all of that, what should we do?

The main criticisms of non-market valuation surveys that I think have substance are that, in some cases, the general public is not well enough informed to provide meaningful values, and that surveys are too expensive to be conducted for every environmental decision that has to be made.

The first point was emphasised by Drew Collins in his comment on Part 3. Later on I’ll talk about some alternative approaches that avoid this problem.

The high cost of non-market valuation surveys is a significant factor when considering how widely they can and should be used. This suggests that we should look at cheap ways to get at relatively approximate values.

The non-market valuation community has come up with “benefit transfer” as their cheap and cheerful option. The idea with benefit transfer is to find other non-market valuation studies for environmental benefits that are similar to the one you are interested in, and use or adapt those. It’s a sensible idea, as long as you can find suitable studies to transfer the values from. That is not necessarily easy. The number and diversity of situations from which values are needed is enormous, whereas the number of existing good-quality non-market valuation studies, while growing, is still relatively modest. Given this, in many cases there will be high uncertainty about how applicable the transferred values are. In general, transferred values are probably rough approximations. But that may be OK — rough approximations are definitely a lot better than nothing when prioritising environmental projects (Pannell, 2009). Indeed, once the high cost of getting more accurate values is considered, approximate information may actually be the best option in many cases.

Transferring benefits like this is not that different from transferring other types of information from one context to another, which happens all the time. For example, when evaluating an environmental project, we need information about the cause-and-effect relationships between management and outcomes, and about the level of compliance/cooperation we are likely to get from the community, and usually we rely on information from studies of other cases to make judgments about these things.

Benefit transfer is not the only way to get approximate non-market values. Another option is to ask a small panel of people to make subjective judgments about the importance or significance of the environmental benefits. (I’ll call these ‘deliberative’ approaches.) There are various versions of this. The approach is sometimes used in Multi-Criteria Analysis, as well as in a variety of related processes that involve providing information to a group of citizens and asking them to make judgments about particular issues (e.g. citizens’ panels, citizens’ juries, citizens’ councils, deliberative focus groups). A third approach is the one we developed for our environmental investment framework, INFFER, where environmental values are elicited from environmental managers using a table of well known environmental assets as examples and a scoring system that converts to dollar values. A fourth version is where the judgments are made by experts (as commonly happens). These deliberative approaches can range from quick and dirty through to quite elaborate and time consuming.

Often deliberative approaches result in environmental benefits being scored or ranked, rather than them being valued in dollar terms. That is sufficient for some decisions (e.g. a consistent scoring system is sufficient for prioritisation of projects when the budget is fixed) but not others (e.g. judgments about how big the budget should be). Deliberative approaches to elicit dollar values for assets are perhaps under-utilised, with the INFFER approach being a rare example.

The main disadvantage of this group of approaches is that the panel’s or experts’ judgments may not be representative of the broader community, and it’s hard to tell whether they are or not.

On the other hand, there are several advantages. The panel can include experts, and/or information can be provided to the panel members in much more depth than is ever possible in a survey. The process can involve discussion and debate, prompting people to think more deeply about the issues. And it is possible to generate values much more cheaply and rapidly relative to doing a survey. The extent of this last benefit depends on how the process is run.

I’m not saying these deliberative processes should always be preferred to non-market valuation surveys. I’d suggest that valuation surveys could be worth investing in where the environmental problem is particularly important, the environmental issues are well known to and well understood by the community, and the results of a survey could make a pivotal difference to whether a major project proceeds. Non-market surveys might also be attractive as a relatively independent approach, particularly where the debate has become partisan or dominated by special interest groups. Beyond this, it is helpful to have a variety of non-market valuation results on the shelf, to help inform benefit transfer, and perhaps to provide information to inform deliberative panels.

Where good quality valuation studies for similar problems are available, benefit transfer may provide a viable fallback option.

Where resources or time are too limited to do a fresh survey (i.e. usually), and benefit transfer is not suitable, or the valuation issue would benefit from a transparent, well-informed discussion and debate, one of the deliberative approaches might be the best option.

Further reading

Pannell, D.J. (2009). The cost of errors in prioritising projects, INFFER Working Paper 0903, University of Western Australia. Full paper (350K)

Pannell, D.J., Roberts, A.M., Park, G., Alexander, J., Curatolo, A. and Marsh, S. (2012). Integrated assessment of public investment in land-use change to protect environmental assets in Australia, Land Use Policy 29(2): 377-387. Journal web site ♦ IDEAS page for this paper

220 – Valuing environmental intangibles, part 3: The cons

Criticisms that have been leveled at survey-based methods for putting dollar values on the environment include: that the results have been shown to be inaccurate or illogical to some degree; that lay people in the community are not sufficiently informed to provide meaningful values; that decisions should be based on the inherent rights of the environment rather than costs and benefits; and that conducting large surveys for environmental valuation is too costly to be worthwhile. 

I mentioned in Part 1 of this series that efforts by environmental economists to put dollar values on intangible environmental benefits have been controversial, both inside and outside economics. In Part 2 I talked about why it’s important to have information about environmental values. This time I’ll delve into the criticisms of environmental valuation.

Most criticisms focus on the survey-based methods of environmental valuation, which are the most widely used approaches, so I’ll focus on those.

Carson and Groves summarised economists’ criticisms as follows:

A major reason why many economists view survey-based estimates of economic values with suspicion is a body of empirical results which seem inconsistent with economic intuition. These anomalous results have often been interpreted as evidence of (a) the hypothetical nature of the question, (b) strategic behavior, or (c) preferences which are either ill-defined or inconsistent with economic theory. (Carson and Groves, 2007, p. 182).

Carson and Groves argued that these concerns are over-stated, and developed new theory to provide a stronger foundation for survey-based methods (Carson and Groves, 2007; Carson and Groves, 2010). They argued that hypothetical questions can still be highly “consequential”, and that in such cases people have an incentive to answer accurately.

I would add that we should keep things in perspective. Sure, there are likely to be biases in people’s responses to environmental valuation surveys, but there are factors that introduce error and uncertainty into every economic analysis. This is just one of those, and evidence indicates that the errors are not especially large compared to other common sources of error. They are not so big that they can’t be accounted for when results are interpreted.

These first criticisms are basically that survey-based methods are likely to be inaccurate, to some extent. While that’s true, what is often ignored is that the technical/ecological information needed to evaluate an environmental investment is also almost always subject to great uncertainty and is, in my judgement, somewhere between quite inaccurate and very inaccurate in many analyses. When applying INFFER we have found that the available information about cause-and-effect relationships (between management and outcomes) is almost always weak. I would say that confidence about that information should often be lower than confidence about environmental values derived from a survey — sometime much lower. And yet I don’t hear people saying that we should not use whatever information we have about cause and effect. Instead, the approach of environmental policy is generally to use the “best available science”, even if the best available is not very good. I believe that’s a defensible position for both ecological information and environmental values. Using approximate information is vastly better than not using any information (PD159).

Next, there are questions about who ought to be providing values and on what basis. Economists generally argue that the values that matter are the values felt by the community as a whole. After all, their taxes are being used for the environmental programs, and environmental assets in a sense belong to us all, not to scientists or government departments. I have sympathy with that position.

On the other hand, it has been argued that, at least in some cases, people are not sufficiently well informed about the environmental issues at stake to provide meaningful values. There is an element of truth in that too. Indeed, at least some community members feel that it should not be up to them to specify what the environmental values are. They prefer to leave it in the hands of experts (Clark et al., 2000).

That is, in fact, what happens in most cases. Experts, often environmental scientists or environmental managers, are asked to provide advice and make decisions, and the decisions they make reflect environmental valuations, sometimes explicitly, sometimes implicitly. Government systems are quite accustomed to this approach and are pretty comfortable with it.

I think both approaches potentially have merit. The two groups (lay people and experts) tend to use different criteria to represent environmental values, and both are relevant. The more ecology-based, longer-term, less utilitarian criteria that experts tend to use may in fact result in benefits for the community that lay people do not recognise or anticipate. It’s striking that although there has been an enormous amount of work trying to improve the quality and rigor of public survey approaches, there has been almost no equivalent work by economists on expert-based approaches, which are actually much more commonly used. There is scope for some really valuable work in this space.

Some people feel it is just wrong to try to put dollar values on environmental assets. I can see where this feeling comes from, but I don’t buy it. We (or at least our representatives in government) make decisions about the environment all the time, weighing up whether resources are best used for the environment or for other purposes. Every time we do that, we implicitly put a dollar value on the environment. Non-market valuation techniques just do that in a more transparent and democratic way. Sometimes people seem to feel that valuation studies should not be used as the basis for decisions to fund or not fund environmental projects, because all such projects should simply be funded. I think that’s completely indefensible. Every public investment in the environment has an opportunity cost – it means less public investment in health, poverty alleviation, disability services, etc., or more tax collected. To ignore that and prioritise environmental projects above all others would be morally wrong, in my view.

There is an argument put by some that the environment should be treated as if it has innate rights, much like human rights. This seems to imply that those rights should not be violated under any circumstances. If that’s the view, it amounts to the same as the previous view that I described as morally wrong. In any case, human rights (and even human life) are not protected at any cost, so why should environmental rights be? For example, as a community we pay only so much to reduce the risk of a death at a busy road intersection. We could have fly-overs at every intersection if cost were no object.

Finally, on the subject of cost, there is the fact that conducting non-market valuation studies costs money. It’s quite expensive actually. A set of good-quality results costs of the order of $50,000. Even though it’s true that information on environmental values is valuable, the value of that information (better environmental outcomes as a result of improved decision making) needs to be weighed up against the cost of obtaining it. It will be worth paying for the information in some cases but not others. Or it might be worth paying for approximate information but not relatively accurate information.

Given the huge number of environmental assets out there that could be the focus of environmental investments, it is completely implausible that surveys could be done for each of them. Given the typical sizes of budgets for environmental programs, the cost of applying non-market valuation comprehensively would take a large share of the total budget for environmental protection, and that would make no sense. (There aren’t enough environmental economists trained in the methods to do the work  anyway.)

In cases where we lack strong technical/ecological information about the potential environmental investment (i.e. most cases), a judgement is needed about the balance of resources given to getting more accurate information about environmental values, or more accurate information about the relationship between management and environmental condition. It might well be appropriate to give greater priority to improving the technical information in many cases.

And yet, as I argued in part 2, we do need information about the values of environmental assets to help decide whether they are worth investing in. Next time I’ll discuss how we might cope with this dilemma.

References

Carson, R.T. and T. Groves (2007). Incentive and Information Properties of Preference Questions, Environmental and Resource Economics 37, 181‐210. IDEAS page for this paper

Carson, R.T & Groves, T. (2010). Incentive and Information Properties of Preference Questions: Commentary and extensions, University of California at San Diego, Economics Working Paper Series qt88d8644g, Department of Economics, UC San Diego. IDEAS page for this paper

Clark, J., Burgess, J. and Harrison, C.M. (2000). “I struggled with this money business”: respondents’ perspectives on contingent valuation, Ecological Economics, 33(1), 45-62. IDEAS page for this paper

219 – Valuing environmental intangibles, part 2: The pro’s

Why is it a good idea to estimate the dollar values of environmental benefits? To help with decision making about public investment in environmental projects, to provide an independent voice in the discussion about how important a project or program is, and to increase the chances that good environmental projects will receive funding.

After some feedback about PD218, I realised I needed to clarify what I (and economists generally) mean by “values” and “valuing”. When I talk about valuing the environment, I’m talking about something like what a property valuer does. He/she provides a valuation – a realistic dollar value. This is related to, but different from, another common meaning of “values”: those qualities regarded by a person as important or desirable, or a set of standards and principles. Both of these meanings (dollars and principles) are used at different times in common language, but we’ll use the first one for the purpose of this discussion.

So, looking at the pro’s of doing environmental valuation, key questions are, why do we need such values, and what difference would it make if we had them, compared to if didn’t have them?

We need information about environmental values because (a) the importance to the community of different environmental assets varies enormously, and (b) ignoring this when making decisions about which environmental assets will receive public funding is very likely to result in poor decisions about how to spend the resources of environmental programs.

To illustrate (a), think about how important the Australian community considers the Great Barrier Reef to be, compared with Badjaling Nature Reserve, a small reserve in the Western Australian wheatbelt. The relative values of these things should be considered when weighing up how much to spend on each of them. Of course, there are other things that should be considered too, including the levels of degradation they have suffered or are predicted to suffer, the effectiveness of available management actions to prevent or repair degradation, the likely degree of cooperation from relevant people and organisations, various risks that may affect the success of a project, and the costs involved (e.g. see PD174, PD185). But environmental values clearly are one of the variables that determine the relative benefits of competing investments.

OK, environmental values are relevant, but are they important? If, when making prioritisation decisions, we factor in all of the other relevant variables but leave out values, does it really matter? Would it greatly affect the aggregate environmental outcomes from a large number of environmental investment decisions? The answer is “yes”. It makes a very big difference if any one of the key variables is omitted from the decision process. In a detailed analysis of this question (see PD158), I found that omitting one variable (such as values) from an otherwise perfect decision process would result in the loss of around 40% of the potential environmental values that the portfolio of projects could have generated. The environmental results are very sensitive indeed to leaving environmental values out of the decision process.

Often when environmental projects are being prioritised, the total budget for the environmental program is fixed. In these cases it is not necessary to express environmental values in dollar terms. Some other non-financial metric for benefits would do just as well for the purposes of prioritisation, as long as the relativities between different environmental benefits were consistent with the relativities you would get from a non-market valuation. Of course, you wouldn’t know whether they were consistent without conducting non-market valuation studies, but perhaps other approximations might be acceptable in some situations. (I’ll talk more about the issue of approximations in part 4 of this series.)

On the other hand, if the total budget for a program is not fixed, and you are going to use the analysis to support decisions about how big the budget should be, then you do need dollar values. They allow you to weigh up the benefits and costs of environmental investments to judge whether additional funding would be worthwhile.

Similarly, if you are trying to assess whether an individual project is worthwhile overall (rather than just ranking it relative to other projects) then dollar values are needed.

That sort of assessment is quite important to economists in our efforts to get the best value for money from public expenditure. We seek to provide independent assessments of projects, including of environmental values. Without that, the risk is that decisions will be based on the views and values of a special interest group from one side or the other.

If a valuation study feeds into an assessment showing that a particular environmental investment is highly beneficial to the community, this could then be used to make a stronger case for funding. For example, the North Central Catchment Management Authority was successful in 2011 in securing funding for some large projects, in part because of the quality of the analyses they had done using INFFER, which includes a simple environmental valuation component.

So there are some pretty important pro’s for environmental valuation. Next time I’ll look at the cons.

In commenting on this post, please keep the focus on arguments in favour of non-market valuation. If you have arguments against, save them up and post them next time so that we can group the arguments together.

Further reading

Pannell, D.J. and Roberts, A.M. (2010). The National Action Plan for Salinity and Water Quality: A retrospective assessment, Australian Journal of Agricultural and Resource Economics54(4): 437-456. Journal web site here ♦ IDEAS page for this paper

Pannell, D.J., Roberts, A.M., Park, G., Alexander, J., Curatolo, A. and Marsh, S. (2012). Integrated assessment of public investment in land-use change to protect environmental assets in Australia, Land Use Policy 29(2): 377-387. Journal web site ♦ IDEAS page for this paper