Econ 4910 Environmental Economics

ENVIRONMENTAL VALUATION
Techniques and applications
Ståle Navrud
Department of Economics and Resource Management
Norwegian University of Life Sciences

2111
2005
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
Department of Economics and Resource Management

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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NORWEGIAN UNIVERSITY OF LIFE SCIENCES
Department of Economics and Resource Management

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NORWEGIAN UNIVERSITY OF LIFE SCIENCES Department of Economics and
Department of Economics and Resource Management
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 Q 0  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 Emission/burden

Dispersion model
Methods
Changed concentrations EIA

Dose-response
functions

Impacts (Recreation, Commercial, Ecological)

Database of studies and
Benefit Transfer techniques, Economic Valuation
or New valuation study Methods

Damage costs (and identify externalities)

Classification of Environmental Valuation Techniques
___________________________________________________________________________
I) Methods based on individual preferences

Indirect Direct

Revealed Household Production Function

Preferences (HPF) Approach: Simulated markets
- Travel Cost (TC)
(RP)
- Averting Costs (AC) Market prices

Hedonic Price (HP) method Replacement Costs (RC)

Stated Contingent Ranking (CR)

Preferences
Choice Modelling (CM) Contingent Valuation (CV)
(SP)
Classification of Environmental Valuation Techniques
___________________________________________________________________________
II) Methods based on decision makers’/experts’/interest groups’ preferences

Indirect Direct

Revealed Implicit valuation (IV)

Preferences
(RP)

Stated Preferences Multi Criteria Analysis (MCA) Delphi Method

(SP)
 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 Reference

or Household oil spilled Mean WTP(euro) per Resource
Oil Spill surveyed (tons) household, one-time injury;
amount
Prevention according to
Plan CV survey

Exxon Valdez Prince William 38.800 31 1.600 km Carson et.

1989 Sound, Alaska, (Median WTP; of sea shore al. (1992)
USA / used as a robust lower affected,
All US bound of Killed 75.000 -
results from discrete
Households 50.000 sea
choice WTP questions)
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 Reference
or Household oil spilled Mean WTP (euro) per Resource
Oil Spill surveyed (tons) household, one-time injury;
amount
Prevention according to
Plan 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”; effects on
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
British Colombia (equals size of the Nestucca some effects on
(Canada) oil spill) fish/shores
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
Ship/Year Location of spill / Amount of Damages Natural Reference
or Household oil spilled Mean WTP(euro) per Resource
Oil Spill surveyed (tons) household, one-time injury;
amount
Prevention according to
Plan CV survey

Blücher 19942 Outer Oslo Fjord, 1.500 400-660 Oil spills Bergland (1994)
Norway /Households
in beach
in the nearby local
community of Frogn 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 Services
restoration with natural
recovery

Interim losses

Source:Modified fom
NOAA (1997)
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 Collection of studies, mostly hedonic
studies wage
Central value: €1.4 million[1] Central value: $6.1 million

Sensitivity around Base Estimate Upper limit: €3.5m from ExternE Weibull distribution fitted to collection of
Lower estimate: €0.65m (requiring fewer study means
adjustments)

Age 0.7 adjustment for age 70+ No adjustment

Alternative calculations with VLY and
age-specific VOSL

Cross-Sectional Income Differences No adjustment, EU15 No adjustment

PPP adjustment between EU15 and
Accession Countries

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 Has varied:

percent real discount rate No discounting
Sensitivity rate of 2 percent to reflect Discount over latency period at 2 to 3
likely rise in real income over time 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 %
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
Department of Economics and Resource Management

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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NORWEGIAN UNIVERSITY OF LIFE SCIENCES
Department of Economics and Resource Management

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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