Accounting, Environmental Resource Values, and Non-market Valuation Techniques for Environmental Resources: A Review Markus J. Milne University of Otago, Dunedin, New Zealand, and University of Lancaster, UK All the fact in natural history, taken by themselves, have no value but are barren like a single sex. But marry i to human history, and itis fll of life (Ralph Waldo Emerson, Nature, 1836) Introduction A number of different approaches to the problem of including environmental values in a decision-making framework have been identified (see, for exaraple, Saddler et al, (1980) and Turner (1991). One extreme approach is to exclude environmental values, thereby implicitly assuming that they are worth noting; the opposite extreme, often implicit in the arguments of some environmentalsts, is to suggest environmental values have infinite worth, that nature is sacrosanct and beyond measurement. The latter approach places the environment in a ‘morally superior position to any economic system, and implies that the ceath of a single fly provides grounds for bankrupting the largest of corporations (Coss, 1989). A third approach, taken in many environmental impact analyses (ELA), is to set out the relevant environmental factors in the form of a descristive analysis(1|. A decision is taken after comparing the descriptive analysis with the financial analysis for the intended development. EIA has been mandatory for some projects in many countries, including the US, Canada, Australia, New Zealand and, more recently, the UK following an BEC directive/2]. It is argued, however, that this type of approach often fails to make explicit the value judgements of the decision maker(s) (Hundloe et al., 1990). A fourth approach, advocated by economists, is to find the outcome of the decision process which maximises net benefits and requires that all the benefits and all the costs of each alternative be measured in a common unit, usually in monetary tems. ‘The purposes of this article are to present an argument for the explicit incorporation of environmental resource values into a management decision- making framework and to review methods of environmental resource valuation ‘The author is grateful to Kate Brown, Alan MacGregor and Ross Cullen for their helpful commnents and suggestions on an earlier draft of this article. Thanks are also due to Kerry Turner, Rob Gray and Richard Laugh fr constructive comments during the review process. Ailerrors remain the sole responsibilty of the author. Accounting, Environmental Resource Values 81 need iment Pes, O85AAAS 82 used by economists to incorporate environmental considerations into public decision-making settings. The primary focus of the article concerns the measurement of non-market environmental resource values. Such environmental resource valuation methods may prove to be useful in the development of procedures for corporate decision making and management accounting Economic theory has often provided the benchmark for developments in accounting. Many of the techniques for decision making which make up much of the conventional wisdom in management accounting are (rightly or wrongly) based on the economic theory of manginal analysis (see Scapens, 1984). Similarly, much of the inflation accounting debate during the 1960s and 1970s, and the developments that arose out of it, relied on theoretical notions of income from economics for guidance (see Tweedie and Whittington, -984). The recent and continuing developments in environmental economics, then, may provide a useful starting-point from which to explore possibiities for extending rational corporate decision-making techniques to include environmental considerations|3). The formal decision analysis invoked in traditional menagement accounting typically excludes a wide range of non-financial activities. Such activities may be included in the decision framework as qualitative factors to be considered in some subjective sense, however. Mathews (1984) has referred to the inclusion of these wider activities in a formal decision framework as Total Impact ‘Accounting. Total Impact Accounting attempts to incorporate externalities, ie. the social costs and benefits which go beyond the private entity that creates them into the decision-making process. Corporate activities that affect the environment naturally generate externalities, such as ait and water pollution. ‘Although the importance of the need to report the impact of corporate activities on the physical environment has long been recognised in the social accounting literature|4), very little research has appeared to date on extending internal information systems to incorporate the wider range of social costs and benefits associated with corporate activities. Some notable exceptions include an early article by Brooks (1979), which outlines the case for cost-benefit analysis by management accountants, and the monograph by Burke (1984) on incorporating labour displacement costs and benefits in a plant-closing decision Similarly, Harte and Owen (1987) write in support of attempts to measure the social and economic impact of plant closures on local communities. Dierkes and Preston (1977) have also identified the possible contribution of willingness- to-pay measures to ascertain social costs and benefits as a basis for formal decision-making procedures. More recently, Gray (1990) has outlined some possibilities for extending corporate internal information systems to include environmental considerations. These include: developing an environmental department and policies; introducing ethical and enviconmental audits; and undertaking a resource flow input-output analysis (see Gray, 1990, chapter 5). Internal social accounting systems are essential to prevent socially irresponsible decisions from occurring, rather than merely reporting and evaluating the resulting damage (Preston, 1981). ‘The lack of research in this area may be attributed to either the philosophical issue of whether private sector organisations should really be concerned withwhat are effectively public concerns and the province of public decision makers, or the methodological problems associated with measuring social costs and benefits (see Benston, 1982; Mathews, 1984; Schreuder and Ramanathan, 1984). The growing body of literature in business ethics generally supports the expansion of corporate responsibility[5]. Further, developments in applied micro economics are overcoming many of the practical problems of social cost and benefit measurement, Therefore the question of how corporate decision Processes might be expanded to incorporate environmental factors would seem to be a valid and timely research problem. In addition to the challenge launched by Preston (1981) and Mathews (1984), recent directions of legal decisions raise the likelihood of liability for environraental damage resulting from corporate activities. While still only a probability for some impacts, the developments in environmental law, particularly in the US, suggest that more focus will be required during the decision-making process on the potential environmental effects of corporate decisions. The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, 1980), commonly referred to as “Superfund”, amended by the Superfund Amendments and Reauthorisation Act (GARA, 1986), permits US governmental entities to recover monetary damages when a release of hazardous substances causes in “injury to, destruction of, or loss of natural resources”. Natural resources are defined to include “‘land, fish, wildlife, biota, air, water, ground-water, drinking-water supplies, and other resources belonging to, managed by, held in trust by, appertaining to, or otherwise controlled by the US”. Section 301 of Superfund authorises the President to promulgate valuation regulations. The Department of the Interior, delegated the regulation task, has since created a “‘Type A” valuation methodology for simplified assessments requiring minimal field observation, and a more elaborate ‘“Type B" valuation methodology for individual case assessments. Section 311 of the Clean Water Act (1982) assigns liability for the discharge of oil or hazardous substances into the US navigable waters or near the coastal shoreline. In addition, state statutes or state coramon law may enable a state government to recover damages(6]. ‘The combination of a recognition in the accounting literature of the need for explicit valuation of environmental impacts and the increasing probability of imposed liabilities for such impacts suggests the need for development of valuation techniques that can be applied in an accounting framework. This article will review the efforts by economists to operationalise the costs and benefits of environmental impacts, and the difficulties remaining for transforming economic concepts into accounting data for decision making. A Case Ilustration|7 Picture a river, with origins in a lake high on the slopes of a mountainous plateau, which stretches out over 200 kilometres to the sea. On its journey to the sea the river undergoes several costume changes. Rock gardens create exiting and turbulent rapids. Trout poke and dart about in deep pools and beds of boulders and shingle. Long peaceful gorges unwind serenely. Large tracts of unmodified lowland forest, filled with the sounds of native birdsong, skirt the Accounting, Environmental Resource Values 83river over much of its length. Many parts of the river and its surrounding wilderness are inaccessible by road, providing numerous opportunities for undiminished natural experiences. From the exhilarating and challenging excitement of canoeing the rapids to the tranquil pastime of fishing the pools ‘or simply just enjoying the scenic splendour, the river is, for many, a scenic and recreational resource of significant value. Alas, the picture may soon no longer exist as described. An upstream hydroelectric development project threatens to divert a significant volume of ‘water away from the river and into penstocks to generate electricity. The physical effects of this development are clear, a drop in water levels, possibly some deterioration in water quality and the consequent damage to the recreational resource, coupled with an increase in kilowatts of electricity. But how are we to choose between extra electricity and the unspoiled recreational resource? If the hydro development is the project of a private business firm and cost- benefit analysis is the decision criterion, then the answer is straightforward. ‘The firm will, assuming rational decision making, undertake financial analysis to determine the project's profitability. Theoretically, this involves a discounted cash flow exercise which incorporates the selling prices of the electricity outputs with the purchase costs of the generating inputs. The financial analysis will exclude the costs (lost benefits) imposed on those who use and value the recreational resource. Effectively, this places a value of zero on the lost recreational benefits. In the final decision, however, the lost benefits may be implicitly incorporated. It is possible that the lost recreational benefits are qualitatively weighted and this could potentially reverse ar otherwise financially profitable decision. Faced with a choice between a gooc! which is tied to the market and one which is not, or a choice situation which involves non-marketed goods, the decision tools so often advocated for the private sector fal to provide ee decision maker with explicit mechanisms for incorporating the non-market elements, On the other hand, if the project involves public expenditure, an attempt will (or should) be made to incorporate explicitly the social losses of the recreational resource by using cost-benefit analysis. But how is this to be done? How are ‘we to put a value on scenic and recreational resources which are not traded in any market? How do we value a canoeing experience or the aesthetic pleasure gained from a free-flowing river view? ‘The following sections of this article explore some of these issues. First, a summary of the background to property rights and externalities is presented. Next, different notions of value for environmental resources, and their connections with different approaches to cost-benefit decision making, are discussed. Finally, the economic notion of total economic value and some of the different techniques to obtain monetary values for non-market resources, specifically the dose-response, hedonic price, travel cost, and contingent valuation methods, are reviewed. Property Rights and Externalities|8| In economic theory, pure public goods or collective goods ate defined as goods which exhibit characteristics of both non-excludability and non-rivalry inconsumption (Dasgupta and Pearce, 1972). The non-excludability condition requires that if good is provided to one person itis provided to others because the others cannot be excluded from it. Non-rivalry in consumption requires that consumption of a good by one person does not prevent its consumption by another. The provision of national defence, for example, meets both conditions. Other (most) public goods may be more ambiguous. The consumption of radio waves by one consumer, for example, does not prevent others from listening to that radio station, but consumers can be excluded if they do not possess the requisite technology and licence to receive. Pure private goods, by contrast, are both excludable and rival in consumption, Coramon property goods, which may be communally owned, used and managed, fall somewhere in between the two extremes of pure public and pure private goods. Generally, they are rival in use but non-excludable. Examples of common property resources inclucle common pastures, ocean fisheries, and clean water (See Ciriacy-Wantrup and Bishop, 1975; Dasgupta, 1982, chapter 2; Wade, 1987). ‘Some natural resources exhibit private good characteristics. Fossil fuels, minerals, agricultural and some forested land would be examples of such resources. Private markets for the allocation of these resources tend to develop and function reasonably well[9]. Environmental problems, by contrast, are often associated with resources which exhibit public good characteristics, where markets fail to develop or only incomplete markets exist. For such resources, for example, clean air and water, ocean fisheries and natural areas, incomplete markets create a danger of exhaustion from misuse (Dasgupta, 1982). For private goods, property rights are relatively easy and inexpens've to establish and enforce. The possession of actual property rights bestows duties on others to respect those rights. Property rights also afford protection azainst unwanted incursions or, should an incursion occur, ensure that damages are available for compensation{10]. It is in the absence of clear property rights that externalities arise. In those instances, the victim of incursion has no rights, and the party imposing unwanted costs has privilege or presumptive rights in the absence of any prohibition. Thus, in the case of our hydroelectric project, the corporate entity has privilege and those who care for the quality of the river and its recreational benefits have no rights|11| Externalities or external diseconomies/economies can be defined as costs/benefits going beyond the decision unit that creates them (Bromley, 1986). This means that the activity (production or consumption) of one entity affects the production or utility levels of other entities and the effect goes unpriced or uncompensated (Dasgupta and Pearce, 1972). Externality theory demonstrates that, in the absence of transaction costs and ignoring income effects, a “‘bargained’’ equilibrium can be reached which internalises the externality (Coase, 1960). Furthermore, the same equilibrium point will be reached regardless of who possesses the initial property rights. For example, should the recreationists pay the hydroelectric company not to develop, or the company pay the recreationists to develop, the same level of water volume is to be expected. If income effects are included in the analysis, the original distribution of property rights is likely to affect the bargained equilibria after Accounting, Environmental Resource Values 8543 86 internalising the externality, favouring those with initial possession{12). These bargained solutions will, however, be efficient and involve no government intervention. For the events just described, which are referred to as private externalities, one would expect some form of market mechanism to have emerged and already internalised them. For these reasons, defining and clarifying property rights is often proposed as a mechanism for dealing with public externalities. In the absence of property rights, our recreational river users are very unlikely to receive a voluntary compensation payment from the hydroelectricity company which possesses the current privilege for water use, even if we could "‘price"” the externality using some method of non-market valuation. Itis not at all clear, however, that simply redefining the existing structure of property rights in favour of recreational users will result in an acceptable bargained solution, again assuming no pricing problems. In fact, the more pervasive and public the externality — the more people creating it and affected by it — the less likely it is that a bargained solution will develop to internalise the effect (Hartwick and Olewiler, 1986). In the case of public externalities, negotiation is effectively prohibited because of the excessive transaction costs involved in bargaining. In the absence of market mechanisms to internalise public externalities some form of intervention is required to create the necessary incentives. Methods proposed for use by governments typically include taxes, subsidies, quantity emission standards and, more recently, effluent charges ard tradable emissions permits (see, for example, Pearce and Turner, 1990). Given the need for incentives to control public externalities, the remainder cf this article focuses on how cost-benefit analysis and non-market valuation methods can be used to help “price’” those external effects and redress the asymmetry in valuation. Environmental Resource Values and Cost-benefit Analysis|13| A survey of the environmental literature will reveal to the reader a host of different notions of value for environmental resources including use, non-use, option, bequest, existence, intrinsic, ecological, scientific, aesthetic, cultural, historic, therapeutic and others[l4). In part, this diversity of value concepts reflects the different approaches of economists, geographers, lawyers and ethicists to environmental resources. In part, the diversity also reflects the lack of a standardised set of terms and definitions for environmental values, even within a single approach. Turner (1991) identifies four main approaches to project appraisal and environmental resource management which have emerged over the last few decades. These approaches, outlined below, derive their fundamental characteristics from different ethical bases and the relative emphasis they place ‘on economic, social, and ecological values{15]. ‘The conventional approach to environmental resources is one which gives pre-eminence to economic value and in particular economic efficiency. Such an approach is based on the fundamental value premiss that only individuals’ preferences should count. Moreover, traditional econcmics has tended to consider only those preferences as revealed by individuals in their willingness-