Transcript Document

The Economics of Ecosystems & Biodiversity
Session 2:
Valuation methods 1
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Approaches to Valuing Ecosystem
Services
 Direct market valuation approaches: use data from
actual markets
 Revealed preference approaches: economic agents
“reveal” their preferences through their choices
 Stated preferences approaches: simulated markets where
values are sought for changes in provision or policy
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Direct market valuation: Market-based
 Market price based approaches
– Most often used to obtain values for provisioning services
– Preferences and marginal cost of production are reflected in
market price
– In well functioning markets, price provides accurate information
on value
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Direct market valuation: Cost-based
 Cost based approaches
– Costs incurred in recreating an ecosystem service
artificially
 Avoided cost method
 Replacement cost method
 Mitigation or restoration cost
 Appropriate for regulating services
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Direct market valuation: Production function
 Production function approaches
– Estimates contribution of an ecosystem service to a final
commodity
– Improvement in resource base or environmental quality, i.e.
enhanced ecosystem services, lowers costs and prices or
increases quantity of goods
– Requires knowledge of relationships between ecosystems
services and valued end points
 Applicable to regulating and supporting services
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Direct market valuation: limitations
 Lack of markets for ecosystem services
 Markets are distorted
 Replacement cost approach can overstate values
 Production function approaches have specific problems:
– Lack of data/knowledge of cause-effect relationships
– Interactions across ecosystem services increases
likelihood of double counting
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Revealed preference
 RP methods are based on observations of individual
choices related to an ecosystem service
 Appropriate for direct and indirect use goods
 Stages
1.
2.
3.
4.
5.
6.
Determine existence of surrogate market for ecosystem service
Select appropriate RP method
Collect market data to estimate demand function
Infer value of change in quantity/quality from demand function
Aggregate values
Discount values where appropriate
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Revealed preference: Travel Cost Method
 Travel cost method (TCM)
– The value of an environmental good is reflected in the time and
money people spend getting to it e.g. forests, mountains, fishing
sites
– Based on actual behaviour, mostly used for recreation studies
– Visitor surveys are used to determine distance travelled to site,
values are estimated from cost per mile or per hour spent
travelling
– Travel costs are used to estimate the number of visits made
– Only direct use values are estimated
 Appropriate for cultural services
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Revealed preference: Travel Cost Method cont…
 TCM practical issues
– Functional form
– Multipurpose trips:
• ‘Meanderers’ may visit several sites during a trip
• ‘Purposeful visitors’ visit only one site
– Holidaymakers and residents:
• Holidaymakers may have high overall costs but low site visit costs
• Residents have lower travel costs, but may in fact value the site
highly
• Some form of weighting required to account for these
– What costs to include?
• Total cost of travel, marginal cost of visit, value to time
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Travel cost method: example
 Nam and Son (1991)
– Recreational value of the
Hon Mun Islands
Vietnam
– Marine Protected Area
established in 2001 with
US$2m funding over 4
years
– Proposal to expand port
at Nha Trang City with
impacts on water quality
and marine ecosystems
Source: Google Maps
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Travel cost method: example
 Both domestic and foreign visitors to Hon Mun were
surveyed and zonal TCMs estimated
– 10 domestic zones, 3 international zones
– In 2000 there were 397,000 domestic and 118,700
foreign visitors
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Travel cost method: example
 TCM value estimates (1US$ = 14,500VND)
Consumers surplus
Price paid
Recreational value
All
Per
All
Per
All
Per
Visitors
Visitor
Visitors
Visitor
Visitors
Visitor
(US$m)
(US$m)
(US$m)
(US$)
(US$)
(US$)
Domestic
1.49
8.96
2.46
15.16
3.95
22.74
visitors
Foreign
visitors
1.64
Total
3.13
17.22
31
14.77
129.53
13.95
146.76
17.90
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Revealed preference: Hedonic pricing
 Hedonic pricing (HP)
– The value of a good is a function of its characteristics, e.g.
house prices (or rents) are determined by a number of
attributes:
• Structural: number of rooms, garden size, garage size,
central heating, double glazing…
• Socio-economic: quality of schools, unemployment rate,
local taxes…
• Local amenities: access to services, transport links,
environmental quality…
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Revealed preference: Hedonic pricing
 HP practical issues
– Values of those not in property market
– Large amounts of data are required to determine the values of
individual attributes, and needs active market
– Omitted variable bias: important explanatory variables may be
missing from data
– Housing markets tend to be segmented, i.e. several hedonic
models may have to be estimated
– Variables may be correlated, e.g. houses near quarries suffer
from both noise and dust
– Hedonic models often have very complex functional forms
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Hedonic Pricing: example
 UK Defra study on effects of proximity to landfill sites on
house prices
http://archive.defra.gov.uk/environment/waste/strategy/le
gislation/landfill/documents/landfill_disamenity.pdf
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Hedonic Pricing: example
 Types of disamenity from landfill:
– noise, dust, litter, odour, vermin, visual intrusion, perception of
risk
 Housing variables used:
–
–
–
–
–
–
–
bedrooms
bathrooms
type of house (8 classes)
car parking space, single garage, double garage
partial central heating, full central heating
floor area
age (5 classes)
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Hedonic Pricing: example
 Used a GIS database of 592,000 mortgage transactions
– contained data on house values, characteristics, location
– 1990 to 2000 period
– 11,300 landfill sites - 6,100 operational
 Models estimated separately for counties (sub-regions) to
account for differing property markets
 Hedonic model captured 80% of the variation in house
prices, variables had “right” signs
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Hedonic Pricing: example
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Hedonic Pricing: example
 Average reduction in house prices of £5,500 within 0.25
miles of landfill and £1,600 between 0.25 and 0.5 miles
 Average total UK disamenity = £2,483m
 Between £334,350 and £478,990 per landfill site
 Between £1.52 and £2.18 per tonne of waste
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Hedonic Pricing: example
 How are these results used?
– Inform landfill tax levels - initially £15/tonne for active
waste
– Inform planning decisions
– Feed into CBA on landfill siting decisions
• mitigation actions
• financial costs of alternative sites
– Potential for compensation?
• Some evidence of reduction in dis-amenity effects over time
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Revealed preference: limitations
 Market imperfections and policy failures
 Large, good quality data sets required
 Expensive and time consuming
 Omits non-use values
 Sensitive to assumptions made on relationship between
ecosystem service and surrogate market
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Stated preference
 SP approaches use simulated markets to elicit willingness
to pay (WTP) or accept (WTA) values for changes in
ecosystem service provision
 Appropriate for both use and non-use values
– May be difficult to segregate these value motives from
WTP
 Survey based methods in which respondents are
presented with a hypothetical market describing the
change in service provision
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Stated preference
Summary on methods covered
 Contingent valuation method
 One policy-on scenario compared with Business As Usual
(BAU)
 Choice Experiments
 Attributes are compared, e.g. ‘visibility in the sea’
 Some baseline BAU level for each attribute and this is
compared with varying levels (with policy-on)
 Group valuation
 Less commonly applied – links valuation with deliberative
methods
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Stated preference: Contingent valuation
 Contingent valuation method (CVM)
 A hypothetical market is described in which respondents
either buy (WTP) or sell (WTA) a specified level of an
environmental good or service
 The values which are elicited are “contingent” on the
hypothetical market with which respondents are
presented
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Stated preference: Contingent valuation cont…
 Large differences between WTP and WTA for the same
good, neoclassical economic theory suggests they should
be near equal
– Loss aversion and implied property rights - ownership
makes a commodity more valuable
– Absence of substitutes
– Irreversibility
– Income and budget constraints
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Stated preference: CVM process I
 Survey design
– Start with focus groups and consultations with stakeholders
– Decide the nature of the market
– Determine the quantity and quality of information provided for
the good
– Set allocation of property rights
 WTP or WTA
– Determine credible scenario and payment vehicle (tax,
donation, price).
– Choose elicitation method (e.g. dichotomous choice vs. openended elicitation method).
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Stated preference: CVM process II
 Survey implementation and sampling
– Interview implementation: face-to-face, mail, telephone,
internet, groups
– Interviewers: private companies, researchers
– Sampling: convenience sample, representative and
stratified sample
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Stated preference: CVM process III
 Calculate measures of welfare change
– Open-ended – simple mean or trimmed mean (with outliers
removed )
– Payment cards/ladders
– Bidding games
– Dichotomous choice – estimate expected value of WTP or
WTA
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Stated preference: CVM process IV
 Technical validation
– Estimating a bid function
– Testing the validity and reliability of the estimates
produced
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Stated preference: CVM process V
 Aggregation and discounting
– Calculating total WTP from mean/median WTP over
relevant population – for example by multiplying the
sample mean WTP of visitors to a site by the total number
of visitors per annum.
– Discount calculated values as appropriate.
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Stated preference: CVM example
 1989 Exxon Valdez spilt 11 million gallons of oil in
Prince William Sound, Alaska.
 CVM study was carried out to estimate passive use value
(existence, bequest) loss to US citizens.
 WTP values sought for policies to prevent similar spills in
future.
 WTA would have been correct measure.
 Estimated total loss was $2.81bn
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Contingent valuation method: example
• Bann (1999)
– Survey of 300
households’ WTP for
mangrove protection in
Benut, Malaysia (243
useable responses)
Source: Google Maps
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Contingent valuation method: example
 56% of respondents stated a positive WTP, of those
who didn’t 49% gave protest responses, meaning
that
 Payment ladder and dichotomous choice elicitation
methods were used
– The payment ladder asked respondents to tick values
they would pay and cross values they wouldn’t


Mean
US$18
US$61
Median
US$10
US$30
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Stated preference: Choice modelling
 Choice modelling (CM)
– Also referred to as choice experiments (CE)
– Type of conjoint analysis
– Survey respondents make choices across environmental
goods with varying bundles of attributes
– Trade-offs between attributes reveals their values
– Can combine qualitative and quantitative attributes
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Stated preference: Choice modelling
 CM issues:
– Requires specialist statistical design (and software) and
sampling resources
– Choice tasks can be complex
– Potentially complex analytical task
– Inclusion of socio-economic and attitudinal variables is not
straightforward
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Choice Modelling: example
 Valuing quality changes in Caribbean coastal waters for
heterogeneous beach visitors (Beharry-Borg and Scarpa, 2010)
 Most locals do not snorkel or dive. In order to ensure that the
valuation captured both locals and non locals two groups were
Identified snorkelers and non snorkelers.
 Most valuation studies in the Caribbean have focussed on obtaining
WTP values for attributes associated with snorkelling and scuba
diving
 There were 9 attributes in the snorkeler subsample and 6 in the non
snorkeler subsample plus a cost attribute
 Cost was described in terms of a contribution cost to an NGO
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Choice Modelling: example
Attributes
1. Number of boats near the coastline
2. Presence of a marine protected area
Nonsnorkelers
3. Level of coastline development
4. Average bathing water quality
5. Level of vertical visibility
Snorkelers
6. Number of plastics per 30m
7. Contribution fee
8. Number of snorkelers per group
9. Level of coral cover
10. Number of fish seen while snorkelling
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Choice Modelling: example
No Policy
High Policy
Low Policy
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Choice Modelling: example
• 198 (snorkellers) and 86 (non-snorkellers) = 284 respondents
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Choice Modelling: example
 Individual-specific WTP estimates (TT$ ~ 0.16US$)
for snorkelers
Class one (61%)
Class two (39%)
Up to 60 fishes
35
5
Up to 45 % coral cover
50
10
Vertical visibility of up to 10 m
40
10
Marine Protected Area which allows fishing
33
7
Marine Protected Area which prohibits fishing
34
10
Plastics of up to 5 pieces
15
50
Low chance of ear infection
22
25
Low level of development
15
40
1TT$ ~ 0.16US$
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Stated preference: Group valuation
Group valuation
– Combination of stated preference techniques with
deliberative techniques
– Offer a deeper exploration of environmental
information, values and preference formation
– Trade-off of smaller groups versus survey
approaches versus more precise values
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Stated Preference: Limitations
 Sometimes the only way to capture non-use values
 Hypothetical nature of the markets: do the decisions correctly
reflect real-life behaviour?
 Divergence between WTP and WTA estimates (theoretically
equal)
 Insensitivity to scope and scale
 Are the different values comparable to a common metric?
 Goods are complex – is there a need for pre-valuation
workshops so that respondents can better understand their
preferences?
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Comparisons between approaches: Marketbased
Advantages
Market prices •Reflect private WTP
•Construct financial accounts
•Easy to obtain
Disadvantages
•Market imperfections and policy
failures distort prices
•Seasonal variations
•Currency variations
Shadow
prices
•Reflect true economic value or
opportunity cost to society
•Complex to derive
•Require substantial data
•Considered ‘artificial’
Production
function
•Links ecosystem functions to
market values
•Requires modelling of dose
response relationships
•Complex for multi-use systems
•Potential double counting
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Comparisons between approach - costbased
Advantages
Disadvantages
Mitigation/
restoration
costs
•Useful when valuing particular
ecosystem functions
•Diminishing returns and difficulty
in restoring functions
Replacement
costs
•Estimates indirect benefits when
ecological data not available for
estimating damage functions
•Net benefits of replacement may
exceed original function
•May overstate WTP
Avoided
damage cost
•Precautionary principle applied
•Data or resource limitations may
rule out first-best valuation
methods
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Comparisons between approach - Revealed
and stated preference
Advantages
Hedonic pricing •Reflects private WTP
•Based on observed behaviour
Disadvantages
•Data intensive
•Requires defined surrogate
market
Travel cost
•WTP for recreational sites
•Based on observed behaviour
•Data intensive
•Restrictive assumptions about
behaviour
•Sensitive to statistical methods
Contingent
valuation
•Can measure non-use value and give
estimate of TEV
•Sensitive to biases in survey
design and implementation
Choice
modelling
•Simultaneously elicits values for a range of
goods and services
•Complex statistical design and
analysis
•Potential burden on
respondents – choice heuristics
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What do the methods capture?
TEV and valuation methods
Use values
Direct
Non-use values
Indirect
Option
Existence
Bequest
Production Function
Revealed Preference
Stated Preference
Value?
Confidence?
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Session Summary
Different methods available but variability in terms
of:
– Data needs
– Categories of TEV valued
– Confidence in value outcomes
Those that rely on market prices (or surrogates/
proxies) tend to only value a sub-set of ecosystem
services
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Group exercise
 Returning to the gaps on value
information you identified
earlier, can you suggest which
valuation methods might be
appropriate to address the gaps?
 Do any gaps remain?
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