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

8 Comments

  • Matthew Fullerton
    10 July, 2012 - 8:51 am | link

    I think we absolutely need to put a dollar value on environmental assets. The population and decision makers need to realise what these assets are actually worth so they are seen as a sound investment, not an optional extra once we’ve done with all the “real” investment in infrastructure / development etc.

    What we need to know more about is how to understand the value of environmental systems moving beyond individual assets because landscapes are complex. This is especially relevant in assessing the environmental value of landscape systems in flood resilience. This will help move beyond the attitude that says we can ‘fix’ flooding problems. “Nature does not negotiate with human beings” – Ban Ki Mun, Rio+20.

  • 10 July, 2012 - 8:59 am | link

    Hi David. I am enjoying your series of discussion pieces on environmental valuation.

    However in your third installment I believe you have glossed over the issue that ‘people are not sufficiently well informed about the environmental issues at stake to provide meaningful values’. I believe this is a real issue being ignored by valuation practitioners with the result that some high profile valuations are fundamentally wrong and misleading.

    In a discussion piece (see http://www.bdagroup.net/environmental-rent-seeking-choice-modelling-and-australian-waste-policy) I review recent choice modelling studies which have provided valuation estimates integral to subsequent public waste policy decisions. With reference to the work of Boyd and Krupnick (2009) I note that ecological endpoints vary in the extent to which they require understanding of complex scientific relationships in order to ‘translate’ them into outcomes understood by the general public.

    In the recent choice modelling studies I review, respondants were asked to value various recycling targets. After canvassing the nature of potential benefits I conclude:

    “Recycling is a process rather than an endpoint which directly provides value to households. The general public is simply not in a position to understand the breadth and complexity of the related inputs, outputs and associated biophysical, environmental and health relationships, industrial and market processes, and population demographics and exposures that will collectively determine the extent of benefits that increased recycling may generate. Asking them to postulate such values is at best disingenuous. It is akin to arguing that the price an unwitting consumer is willing to pay for a fake ‘premium’ watch reflects fair value – it doesn’t, it is a con.”

    It would be good if you could urge greater caution in how these tools are used, otherwise poor application will ultimately discredit them .. as we saw with Contingent Valuation and the Kakadu exercise.

    regards

    drew

    • 10 July, 2012 - 9:17 am | link

      Thanks Drew. I probably glossed over all the points, really, in such a short piece. I agree with you that this is a significant concern. Not in all cases, but certainly in some. I think non-market valuers should carefully consider whether an issue is too complex or too remote from the knowledge/experience of respondents for a survey to be worth doing.

    • 10 July, 2012 - 10:38 am | link

      Hi Drew

      Could you remind us what the contingent valuation and the Kakadu exercise, and their discrediting, were?

      Thanks

      Josh

  • David Godden
    10 July, 2012 - 9:50 am | link

    Dave: any survey-based tool necessarily relates only to the the current generation. Market-based values are generally projected over the life of the project, conceptually to infinity. However, survey based values generally aren’t (and maybe cannot be). Even if we were to project the current generation’s values forward onto future generations, conventional discounting (at Treasury/Finance recommended rates) would simply eliminate them, just as these discount rates eliminate costs we bequeath to future generations (e.g. decommissioning nuclear facilities) – although social time preference rates (à la UK Treasury’s Green Book on CBA) would keep them more important for longer. Just as we don’t care much about future generations (Marx, G. “Why should I care about future generations? What have they ever done for me?”), they won’t value our consumption resulting from damage to environmental resources that otherwise they would have access to. So the problem is not really about tools, but the broader issue of making the principles of Pareto welfare economics, where all economic agents can conceptually bargain with each other at a point in time, operational at the intertemporal scale. i.e. how can we operationalise intertemporal bargains with unborn economic agents, rather than allowing our generation simply to be dictatorial towards the future?

    • 10 July, 2012 - 11:05 am | link

      Thanks David. Fair comment, up to a point. At least in wealthy countries like Australia, I think it can be argued that current generations do place some weight on the welfare of future generations (as you are doing in your comment). The benefits of climate change policy are predominantly in the distant future, but plenty of us think that’s worth doing (while many don’t). But of course that doesn’t give future generations a say, so doesn’t provide what you’re looking for fully. This is not just an issue with valuation, but with all aspects of decision making that affect long-term environmental outcomes. Is it particularly worse for surveys? I can’t see why it would be.

      Discounting is another issue again, and a very complex/difficult one. http://www.pannelldiscussions.net/2005/01/34-thinking-like-an-economist-10-values-in-the-very-long-term/

      • David Godden
        10 July, 2012 - 12:51 pm | link

        Dave: I agree that the problem is a general one of decision making that affects long-term (environmental) outcomes. I suspect that, once we value environmental intangibles, it’s been such an effort to get there that we don’t necessarily think carefully about what it is that we’ve estimated. So we don’t think of running out the annualised value of the intangibles over the project life, and end up with a CBA which is biased towards marketed goods and services for the present generation. Although, to be fair, it’s probably not as biased as it would have been without valuing the environmental intangibles at all!

  • 10 July, 2012 - 11:30 am | link

    Josh – the early 1990s Kakadu CV by the then Resource Assessment Commission suffered from many problems and resulted in implausibly high valuations – see Bennett, J.W. 1996 “The Contingent Valuation Method: A Post-Kakadu Assessment”, Agenda , 3(2):185-194 for more info. The theory and application of CV has however improved markedly since then.

    The point I was making was that for at least the decade following the Kakadu study, CV had little credibility in Australia and was largely ignored in public policy development. I believe the ‘newer’ CM technique is vastly superiour to CV and by estimating ‘part-worths’ is far more useful in policy processes where the scope of the environmnetal target is a work in progress. To allow shody applications when the technique is starting to get traction in policy circles would be regrettable.

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