Econ 4910 Environmental Economics
ENVIRONMENTAL VALUATION
Techniques and applications
Ståle Navrud
Department of Economics and Resource Management
Norwegian University of Life Sciences
2111
2005
Department of Economics and Resource Management
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
Contents
 Why Value the environment ?
 How to value the environment ?
- Welfare economics
- Willingnessto-pay (WTP)
- Total Economic Value = Use value + Non Use Value
 Environmental Valuation Methods
- Revealed and Stated Preferences
- Damage Function Appraoch
 Applications
- Water Quality, Oil Spills, Externalities of Electricity Production
Health impacts (Value of a Statistical Life), Forest Biodiversity
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 The ultimate validity test. - Will people actually pay?
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Department of Economics and Resource Management
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
4
www.umb.no
Department of Economics and Resource Management
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
Department of Economics and
Resource Management
 33 scientific staff + 6 administrative staff
 About 450 M.Sc and B.Sc students
 Educational Programs:
B.Sc and M.Sc. in Business Administration
B.Sc and M.Sc. in Economics and Resource
Management
M.Sc. in Entrepreneurship and Innovation
M.Sc. In Development and Resource Economics
(11 scholarships per year)
 EU Master in Agricultural Economics and
Agribusiness (co-operation between 6 European
universities), where our department specializes in
in Environmental and Resource Economics
 24 Ph.D. students
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Why value environmental goods?
 Cost-benefit analysis (CBA) of projects/programs
 Environmental costing (environmental taxes etc.)
 Environmental accounting
(at firm level and ”green national accounts)
 Natural Resource Damage Asssessmennt (NRDA)
How to value environmental goods?
 Welfare theory:
Compensating Variation (CV) for a change in
environmental quality Q0  Q1
V (Q0,Y) = V (Q1,Y - CV) = U0
- WTP vs. WTA; CV vs. Equivalent Variation (EV)
 Total Economic Value (TEV)
1) Direct Use Value
- Consumptive and non-consumptive use values
- Option value
2) Passive Use Value (Non-use Value)
- Existence and Bequest values
 Quasi – option value
(Correction factor to TEV, when irreversible loss (of e.g. Species):
= Value of increased information if irreversible action not implemented
 Damage Function Approach
 Environmental Valuation Techniques
Stated Preferences (SP) and Revealed Preferences (RP)
-
Energy Technology(Extraction/Transportation)
Explanation
LCA
Input/Output
Methods
Emission/burden
Dispersion model
Changed concentrations
Dose-response
functions
Impacts (Recreation, Commercial, Ecological)
Database of studies and
Benefit Transfer techniques,
or New valuation study
Economic Valuation
Methods
Damage costs (and identify externalities)
EIA
Classification of Environmental Valuation Techniques
___________________________________________________________________________
I) Methods based on individual preferences
Indirect
Revealed
Preferences
(RP)
Stated
Preferences
(SP)
Household Production Function
(HPF) Approach:
Direct
Simulated markets
- Travel Cost (TC)
- Averting Costs (AC)
Market prices
Hedonic Price (HP) method
Replacement Costs (RC)
Contingent Ranking (CR)
Choice Modelling (CM)
Contingent Valuation (CV)
Classification of Environmental Valuation Techniques
___________________________________________________________________________
II) Methods based on decision makers’/experts’/interest groups’ preferences
Indirect
Revealed
Preferences
Direct
Implicit valuation (IV)
(RP)
Stated Preferences Multi Criteria Analysis (MCA)
(SP)
Delphi Method
Contingent Valuation (CV) method
 Describe environmental impact (EI) /environmental improvement
with and without the Program
- scientifically correct description of EI, but also
understandable to the public; approved by all parties
 Describe the program that will avoid the EI
 Realistic and fair way of paying for the program,
and fair distribution of costs
 Willingness-to-pay (WTP) question:
The program will reduce eutrophication and improve water quality. What is
the most your household is willing to pay in increased water and sewage tax
per year? Open-ended (with payment card)
or
The program will reduce eutrophication and improve water quality at a cost
of X US$ per year in increased water and sewage tax. Will your household
support the program or not ? Referendum-format/ Dichotomous choice
Review of selected Contingent Valuation (CV) studies estimating the willingness-to-pay (WTP) per household (one time amounts)
to avoid natural resource injuries from oil spills in the US and Europe.
Ship/Year
Location of spill /
Amount of
Damages
Natural
or
Household
oil spilled
Resource
Oil Spill
surveyed
(tons)
Mean WTP(euro) per
household, one-time
amount
Prevention
Plan
Reference
injury;
according to
CV survey
Exxon Valdez
Prince William
1989
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1.600 km
Carson et.
Sound, Alaska,
(Median WTP;
of sea shore
al. (1992)
USA /
used as a robust lower
bound of
affected,
results from discrete
choice WTP questions)
50.000 sea
All US
Households
38.800
Killed 75.000 birds, 580 sea
otters,and 100 seals,
no fish killed
Note: The amounts are not annual values but one-time amounts, and should be interpreted as
Present Values (PV). The amounts are converted from US $ and NOK to Euro using
conversion rates of 1 US $ = 1.0 euro and 1 NOK = 0.13 euro. Values are presented in the
year of the study price level. No correction for inflation or difference in purchase power
(e.g. OECDs Purchase Power Parity adjusted exchange rates) have been made.
Ship/Year
Location of spill /
Amount of
Damages
Natural
or
Household
oil spilled
Resource
Oil Spill
surveyed
(tons)
Mean WTP (euro) per
household, one-time
amount
Prevention
Plan
Reference
injury;
according to
CV survey
Nestucca
Gray´s Harbour,
1.000
1 large spill
Kills
Rowe et.
1988
Washing-ton,
termed
in 70 years
300,000 sea
al. (1991)
USA /
“medium
135 - 160
birds and
Households in the
spill”;
State of
WTP for oil
1 medium
fish/shores
Washington
spills of
spill every
Kills
US) and
other sizes
5. year:
40.000 sea
the State of
also elicited
80 -95
birds, and
(equals size of the Nestucca
oil spill)
some effects on
Several small
Kills
spills every
1,000 sea
5. year:
birds, small
50
impacts
Routine very
Few
small spills :
impacts on
25 – 30
fish and shores
British Colombia
(Canada)
effects on
fish/shores
Ship/Year
Location of spill /
Amount of
Damages
Natural
or
Household
oil spilled
Resource
Oil Spill
surveyed
(tons)
Mean WTP(euro) per
household, one-time
amount
Prevention
Plan
Reference
injury;
according to
CV survey
Blücher 19942
Outer Oslo Fjord,
Norway /Households
in the nearby local
community of Frogn
1.500
400-660
Oil spills
Bergland (1994)
in beach
area heavily
used for
recreation
Note: While the Exxon Valdez and Nestucca CV studies were conducted after the acute
oil spill, the Blücher study is based on a hypothetical scenario where all the
remaining oil in the warship Blücher, which sunk in 1940, were spilled during the
process of emptying the ship for oil in the autumn of 1994. The CV study was carried
out during this operation to make the scenario as realistic as possible (since there
was a probability, although small, that all the oil would be spilled). Also, only the
community most affected by a potential spill were interviewed in the Blücher study,
while the national and regional population was surveyed in the Exxon Valdez and
Nerstucca surveys, respectively.
CV survey of avoiding Oil Spills from tankers in Norway
 Klethagen (2005) – M.Sc. Thesis
 201 households in the Oslo area
 Mean WTP per household as a one-time amount
the impacts of a oil spill of:
- 40.000 tonn: 92 euro (1000 km beach oiled)
- 80.000 tonn: 126 euro (2000 km beach oiled)
- Can be compared to the CV-study of the Belgian oil spill
prevention plan = 143 2001-euro to avoid 53.000 tonn oil spill
Habitat Equivalency Analysis (HEA)
Compensatory restoration = Interim Loss
Natural
Resource
services
Area C (= Area A)
Compensatory restoration
Services
with primary
restoration
Interim losses
Source:Modified fom
NOAA (1997)
Services
with natural
recovery
Service-to-Service approach - HEA
Appropriate quantity of replacement natural
resources and services they provide
Determined by obtaining equivalency between:
quantity of discounted services lost due to
Injury (= Interim loss)
quantity of discounted replacement services provided by
the compensatory action
 Habitat Equivalency Analysis (HEA)
 Assumption:
Acceptance of a one-to-one trade-off between
- unit of services lost due to injury, and
- unit of services gained due to restoration
 Use of ”resource proxies” to quantify
ecosystem services
– linked to e.g. indicators of primary production
(area and density of wetland components: live coral cover, mangrove
tree density, marsh-reed stem density)
– Unit: Service-ha-years for oiled beaches, and biomass (tons) for
marine impacts etc.
– Economic Value = units x replacement costs/unit for each service;
aggregated over all services
Comparing Common Practice at DG Environment and US EPA
Issue
DG Environment
US EPA
Conceptual Approach
VOSL, adjusted
VOSL, adjusted
Base Estimate
Best Estimate from UK CVM transport
studies
Central value: €1.4 million[1]
Collection of studies, mostly hedonic
wage
Central value: $6.1 million
Sensitivity around Base Estimate
Upper limit: €3.5m from ExternE
Lower estimate: €0.65m (requiring
fewer adjustments)
Weibull distribution fitted to collection of
study means
Age
0.7 adjustment for age 70+
No adjustment
Alternative calculations with VLY and
age-specific VOSL
Cross-Sectional Income Differences
No adjustment, EU15
PPP adjustment between EU15 and
Accession Countries
No adjustment
Growth in Real Income over Time
See Below
Adjust for changes in per capita GDP
Central income elasticity of WTP of 0.4
Latency
Discount over latency period at 4
percent real discount rate
Sensitivity rate of 2 percent to reflect
likely rise in real income over time
Has varied:
No discounting
Discount over latency period at 2 to 3
percent real discount rate
Cancer Premium
+50% adjustment
No adjustment
Health Status
No adjustment
No adjustment
[1] €0.85=1US$
Value Transfer / Benefit Transfer
Often lack of time and resources  transfer economic
values instead of new valuation study  added uncertainty
Methods
 Unit transfer (WTP/household as one-time amount)
- without corrections
- with corrections (e.g. Income, Purchase Power Parity)
 Function transfer
(WTP = f(Sosioeconomics, env. Quality) from similar type site
- value function
- meta analysis of previous studies
Validity
 5 country CV study of Respiratory Illnesses (caused by air pollution)
 transfer error = 40 %
Department of Economics and Resource Management
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
VALIDITY
1) Content Validity
(e.g assessment of CV questionnaire)
2) Construct validity
- Theoretical
(e.g. WTP = f (Q, Y, S, O) )
- Convergent
(e.g. comparison of SP and RP)
3) Criterion (Predictive) validity
- hypothetical versus actual willingness-to-pay (WTP)
Case: Preserving biodiversity in coniferous forests in the
Oslomarka Forest.
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Department of Economics and Resource Management
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
CHALLENGES
 Increase the number of valuation studies outside USA and
Europe to reduce the uncertainty in value transfers for all
policy uses
 Defining the ”affected population” (N)
Total WTP = N x WTPi
Global / national / regional / local good
 Complex environmental goods - ecosystems
 Validity of non-use values
 Applying environmental valuation techniques
to value health impacts, cultural heritage and other public
goods
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