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

One comment

  • 2 July, 2012 - 7:06 am | link

    I meant to comment on the strengths of the different non-market valuation methods. I touched on these in part 1. The Travel Cost Method and Hedonic pricing have the strength that they are based on real behaviour, rather than people’s responses to hypothetical questions. Contingent Valuation and Choice Experiments have the strength that they can be used to estimate all of the different types of benefits, including the most intangible ones like existence values.

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