Economics, Policy

175 – Environmental valuation: policy challenges

In recent years, environmental economists in Australia have increasingly used a number of methods to estimate dollar values for the benefits provided by the environment. However, one hears these economists expressing disappointment and frustration about the lack of interest by policy makers and environmental managers in this work. Why aren’t they more interested?

The methods are known collectively as “non-market valuation”. The most widely used are survey-based techniques, “choice modeling” and “contingent valuation”. Although I am not an expert in these techniques, I understand them well and I work with people who are experts.

Also, I have been involved in developing and applying INFFER, a framework for evaluating environmental investments (Pannell et al. 2010), which includes environmental significance or value as one of its important inputs. Usually in INFFER we measure significance using a scoring system, although it is also possible to use non-market valuation.

Discussing INFFER with people in a number of environmental organisations has given me some insight into why they are sometimes resistant to environmental valuation. A number of reasons have emerged. The first five issues are not specific to non-market valuation, but are equally applicable to the sort of scoring system we usually use in INFFER.

1. Ignorance is bliss. Information about the values of different environmental assets may be unwelcome because it reduces the flexibility of politicians or managers to take actions that they prefer for one reason or another (e.g. political rather than environmental reasons). A Federal Ministerial advisor was once quite open and explicit about this to me.

2. Avoidance of controversy. A senior manager in a state agency expressed concern about the risk of information about environmental values becoming controversial. It may conflict with the preferences or preconceptions of vocal or influential stakeholders, resulting in high transaction costs and stress for the agency. Avoidance of controversy is often one of the key requirements that ministers impose on their agencies.

3. Lack of any administrative process that could make use of the information. Organisations can only make use of information if they use some process or framework into which the information can be fed. In most processes or frameworks currently used by environmental organisations, there is no scope to include information about community valuation of environmental assets. Ideally, it would feed into a Benefit: Cost Analysis, but these are almost never conducted by environmental agencies. One of our motivations in developing INFFER was to provide a framework into which essential, but often-neglected, information could be fed, including information about environmental significance.

4. Satisfaction with existing methods. Although I consider most of the existing environmental decision frameworks I have seen in use by Australian environmental organisations to be weak, people tend to be highly satisfied with their existing tools and approaches. People often don’t recognise the weaknesses in their decision processes, or the consequences for decision making. However, in detailed tests of different decision metrics, I found that environmental outcomes are highly sensitive to weaknesses in the process (see PD158). Dealing properly with all relevant information really matters.

5. Subjectivity of valuation. Some people object to the subjectivity of valuation. They would prefer to limit the process to things that can be measured more objectively. However, it seems obvious that you should not ignore the fact that some environmental assets are much more significant than others (e.g. the Great Barrier Reef versus a small patch of bush in the wheatbelt), and it is equally obvious that any such comparison of values is unavoidably subjective, however the comparison is made.

Beyond these general concerns about any method for quantifying environmental significance or value, there are a number of factors that relate specifically to non-market valuation:

6. Philosophical objections to monetisation of the environment. This is not uncommon, especially amongst people with a strong interest in the environment. The counter argument is that monetisation is just a tool to facilitate trade-offs between various real outcomes, but some of these people resist the very idea of making trade-offs, so that argument may not help much. Of course, trade-offs are unavoidable, and doing them well can improve environmental outcomes, so this purist position can be self-defeating.

7. Timing issues. Conducting non-market valuation studies in response to current policy needs would usually take too long for the policy time-frame. In practice, policy requirements for such information usually need to be anticipated well in advance, but policy agencies generally don’t do much of this sort of thing ahead of time.

8. Legitimate concerns about limitations of the methods. Some environmental decision makers are aware that there has been a spirited debate about non-market valuation amongst economists. Indeed, some economists have expressed highly critical views about particular non-market valuation techniques (e.g. see quotes in Pannell, 2004). These tend to be rather technical in nature, but one non-technical issue is the challenge of obtaining reliable responses from even quite simple survey questions. Non-market valuation surveys make pretty high demands of people to think about complex issues in abstract ways, so reliability certainly can be a challenge.

9. Preference for expert or policy-maker judgments. Economists usually argue that the people whose valuations matter are the general population. Public policy should serve the wishes of the public, not least because they are the ones whose taxes are going to pay for the environmental works. However, most environmental organisations are accustomed to relying on experts for advice, not just about scientific matters, but also (implicitly) about values. Sometimes the experts themselves don’t realise that the advice they are giving is value-laden. On the other hand, the surveyed community members in a non-market valuation study may know little or nothing about the environmental issues at stake. It’s a dilemma. In my view, it does sometimes make sense to use experts to judge values, either because of their superior knowledge, or because it is an efficient way to approximate community values. Even then, however, such values should be recorded explicitly, for purposes of transparency and accountability.

10. The high cost of doing it. A reliable non-market valuation survey requires a significant level of expenditure. Environmental managers are not used to having to bear this cost, and probably don’t have the budget to do it in all relevant cases.

The following issues have never been expressed or implied to me by someone from an environmental organisation, but in my judgment they are both relevant.

11. The incremental benefits may be modest. As noted above, environmental organisations often use expert judgments to approximate community values. Another option could be to hold community meetings or focus group discussions. Given that we have these relatively cheap and simple fall-back options, what is the incremental value of a high-quality non-market valuation survey of the community? Using information economics theory to guide our thinking about this, the value of the improved information would depend on: (a) how much better the information from a non-market valuation study would be compared to an easier information source; (b) how much difference that improvement in information would make to the decisions that are taken; and (c) the extent to which the differences in decisions would eventually improve the value of environmental outcomes. In my experience, when you do the sums, the value of more precise information is often quite a bit less than people expect. Approximate information can often be nearly as valuable (e.g. see PD159), so it could be rational to use a simpler, cheaper approach to environmental valuation.

Another source of approximate values can be “benefit transfer” — taking results from past non-market valuation studies in analogous situations. Although this would have lower accuracy than purpose-done surveys, it is obviously much cheaper.

12. There are many other information requirements. Environmental valuation is far from being the only information you need to prioritise environmental investments — it’s just one of the (roughly) 10 things you need to know about each investment option. In practice, we find that the biggest sources of uncertainty in these prioritisation decisions are usually uncertainty about human behavioural responses to the intervention, and about the cause-and-effect relationships between actions and environmental outcomes. These other sources of high uncertainty put a limit on the potential for greater accuracy about environmental values to improve environmental decisions. It may not be the most important information gap to fill first.

Some of the reasons given for not using non-market valuation don’t stand up to scrutiny (1, 2, 4, 5 and 6, I would suggest) or could be easily addressed (3, 7). On the other hand, some of the issues raised could favour use of simpler, less costly approaches to quantifying environmental values in particular cases (8, 9, 10, 11, 12), potentially including benefit transfer.

The fact that there are so many items on this list suggests that proponents of non-market valuation face quite significant challenges in getting the approach more widely and routinely used in real decision making. We are finding with INFFER that, with sufficient persistence, creativity and good communication, we can get environmental managers to accept the need for some method for quantifying environmental values, and this may be a stepping stone to increased demand for non-market valuation. The later issues on the list are, however, likely to continue to dampen that demand, at least for purpose-conducted studies.

David Pannell, The University of Western Australia

Further reading

Pannell, D.J. (2004). Heathens in the chapel? Application of economics to biodiversity, Pacific Conservation Biology 10(2/3): 88-105. Full paper (109K)

Pannell, D.J., Roberts, A.M., Park, G., Curatolo, A. and Marsh, S. (2010). INFFER (Investment Framework For Environmental Resources): Practical and Theoretical Underpinnings, INFFER Working Paper 1001, University of Western Australia. Full paper (107K)