Economic valuation of values and services

Valuing ecosystem services

Sometimes it can be useful to have an estimate of the monetary value of these services. For example, decision making tools such as cost-benefit analysis and cost-effectiveness analysis prefer monetary values as inputs. This allows for the importance of all aspects of value, both use and non-use, to be objectively considered.

The value for different ecosystem services can be estimated based on market-based valuation method and non-market valuation methods.

For some goods and services (such as food, fish, water), the competitive market price can be considered to estimate the total value (Quantity x Market price)[14].

For other goods there is no market price that exists and so non-market valuation is required. The methods to carry out non-market valuation are complicated and underpinned on different assumptions that need technical expertise to perform.

Non-market valuation of ecosystem services

There are two broad categories of non-market valuation.

Revealed preference methods

Non-extractive use values can be indirectly estimated through revealed preference methods. Revealed preference methods observe the behaviour of people through their market transactions to assess their values of different goods and services. The most common methods are travel cost and Hedonic price analysis.

The Hedonic pricing method analyses property transactions to estimate the non-tangible benefits such as green view of wetland. A property can be considered as a bundle of attributes, which includes neighbourhood environmental characteristics such as green space as well. Considering the heterogeneity of properties, a value for each attribute can be assessed[8][7]

People’s visitation to a wetland depends on its tangible (such as fish) and non-tangible (such as bird watching) uses and the expenses incurred for each visit represent the visitors’ willingness to pay[12]. This willingness to pay is taken to represent the value the visitor holds for the wetland. This method is called the travel cost method. There are two travel cost methods, individual travel cost (individual expenses for visiting) or zonal travel cost method (considering average visitors from different zones).

Stated preference methods

Stated preference methods directly elicit values from the public for existing ecosystem services as well as potential changes to ecosystem services using specially designed methods[1]. This method presents hypothetical scenarios in surveys with different combinations of attributes of a natural entity. Then respondents can be asked to rank or choose their best (worst in some cases) preferences. A monetary estimate of various attributes of the ecosystem services are then derived from the responses. Discrete choice experiment analysis, Contingent valuation method and best-worst scaling are some common stated preference methods used in ecosystem valuation.

A Discrete choice experiment is a commonly used method in valuing the environment. The method involves constructing different hypothetical scenarios of ecosystem improvement to allow respondent to compare with the status quo situation. Based on their bids, the value for different ecosystem services can be assessed.

In the contingent valuation method a single choice is offered to compare with status quo option and respondents are asked to bid the maximum (or minimum) value (or in different method of payment such as willing to increase the tax) they are willing to pay.

Best-worst scaling analysis helps in comparing the importance of different ecosystem services.

In some situations, cost-based methods (abatement cost, restoration cost or replacement cost) can used to value an ecosystem. For instance, erosion can be prevented using an engineering construction instead of wetland. The cost of the construction can be seen to be the replacement value for the wetland – the wetland is worth at least as much as the replacement would cost.

Benefit Transfer

Undertaking non-market valuation studies is often time-consuming and expensive as it requires technical expertise and often field work. However, in some cases it may be appropriate to “transfer” the values from completed non-market valuation studies for use in a different site. Benefit transfer is assisted by databases of environmental valuation studies, such as the Canadian Government’s EVRI. Using a database like EVRI can help give an idea of indicative values for ecosystem goods and services. However, if the values are to be used in an appraisal or other application an economist should be consulted, as there are many considerations to be taken into account when carrying out the transfer such as the similarities between the characteristics of the original study and the proposed application.

Economic appraisal

A good policy development process will identify if government intervention is necessary to address a problem, and assess a range of intervention options. Economic appraisal tools can help with this process by structuring information to show if an intervention will benefit society, or to help decide which intervention offers the most benefits. The most commonly used appraisal tools in Australia are cost benefit analysis, cost-effectiveness analysis and multi-criteria analysis.

cost-benefit analysis is widely accepted as the preferred method for appraising the economic, social, environmental and cultural values of all government policies for Australian governments[2],[9],[11]. This is because this method helps decision makers understand the overall welfare gains or losses to society that accrue from a policy proposal and the relative costs and benefits of potential options. A cost-benefit analysis compares the total costs and benefits of different policy options against the status quo. If the benefits are greater than the costs the policy represents an overall benefit to society.

Preferably all values should be expressed in monetary terms so that they can more easily be compared. When this is not possible or practical it is important that the values are described in a qualitative manner. The process of systematically gathering information on the relative costs and benefits of different policy options helps improve the decision making process.

Cost-effectiveness analysis chooses one outcome and compares the costs of reaching that outcome. For example, a program manager might want to compare the relative costs of achieving a unit of an outcome such as a kilogram of DIN removal. Another scenario might be when a government has committed to meeting a water quality target, and the costs of various options for meeting that target are compared. This approach is most suitable when the options have similar rates of effectiveness[9]. The main limitation to cost-effectiveness analysis is that it assumes that the outcome is desirable and cannot say if overall benefits outweigh the costs.

There is more information on assessing costs and cost effectiveness for treatment systems for pollutant removal.

Multi-criteria analysis is a decision making tool that involves choosing selection criteria, assigning weights and scoring the options against the criteria. The options are then ranked. This method assists with comparing options on many different aspects without the use of monetary valuations. As with cost-effectiveness analysis, however, multi-criteria analysis cannot say if overall benefits outweigh costs. It can also be difficult to replicate as the scoring process is dependent on the judgements of the panellists involved.

Natural capital and environmental economic accounting

Natural capital is the stock of renewable and non-renewable resources, including trees, soils, air, water, and flora and fauna. These assets generate flows of goods and services such as timber, food, recreational opportunities to people. In the case of renewable resources these assets can be maintained so they deliver flows of free good and services to people in perpetuity. Thinking of the environment as an asset can include calculating the maintenance payments necessary to ensure the asset does not depreciate[6].

Natural capital accounting (also referred to environmental accounting or environmental economic accounting) is one method of tracking how well society is protecting assets to make sure they do not decline over time. There are many different accounting systems available for landholders and societies to measure aspects of natural capital.

At a national level, having a system of formal environmental economic accounting can complement traditional national accounts such as GDP. It is hoped that increasing the visibility of natural stocks and flows would help ameliorate the risk of national accounts ignoring the value of nature to humans[15]. The United Nations Statistical Commission has adopted a formal method for assessing national natural capital called the System of Environmental Economic Accounting, or SEEA. Because these accounts are designed to complement other national accounts, they use exchange values which are the prices the goods or services attract in the marketplace, or make estimates of what these value might be in the cases where markets do not exist[10]. As a result, SEEA will sometimes have much lower values for the environment than the welfare methods discussed above[5] (SECTION XXX).

The most recent addition to SEEA is the System of Environmental Economic Accounting - Ecosystem Accounting (SEEA EA) which is a framework for organising data about ecosystems, measuring ecosystem services, and linking this information to measures of economic and human activity[16]. SEEA EA consists of physical accounts measuring ecosystem extent and ecosystem condition to form stock accounts, and then measures ecosystem services, or flows, associated with those stocks. SEEA EA aims to measure these services monetarily, though this is not necessary for the accounts to still be useful.

As SEEA EA is an accounting measure it is focused on the use values of nature (discussed above in section XXXX). This means it will only provide a limited view of the value of nature – for example, the large non-use values people hold for the Great Barrier Reef would not be captured in a natural capital account. Instead, the asset would be seen to generate services such as seafood, recreational services and perhaps local benefits such as coastal defence. The UN however has provided for the possibility of proxy measures for non-use values though that could be accounted for in a separate account[13].

At regional and local levels or for corporate uses it might not be as important to follow strict SEEA guidelines as no comparison to national accounts will be made[4][3]. This would allow for the possibility of mixing exchange and welfare values. Cost-based methods such as replacement value might also be appropriate.

References

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2. ^ Department of the Prime Minister and Cabinet (2020), Cost-benefit analysis. Office of Best Practice Regulation Guidance Note.. [online] Available at: https://oia.pmc.gov.au/sites/default/files/2023-06/cost-benefit-analysis.pdf.
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7. ^ Kumar, D & Choudhury, M (8 November 2021), 'Recognizing Economic Values of Wetland Ecosystem Services: A Study of Emerging Role of Monetary Evaluation of Chandubi Ecosystem and Biodiversity', in S Sharma & P Singh (eds), Wetlands Conservation. [online], Wiley, pp. 87-110. Available at: https://onlinelibrary.wiley.com/doi/10.1002/9781119692621.ch5 [Accessed 29 June 2023].
8. ^ Mei, Y, Sohngen, B & Babb, T (January 2018), 'Valuing urban wetland quality with hedonic price model', Ecological Indicators. [online], vol. 84, pp. 535-545. Available at: https://linkinghub.elsevier.com/retrieve/pii/S1470160X17305903 [Accessed 29 June 2023].
9. ^ a b NSW Treasury (2023), TPG23-08 NSW Government Guide to Cost-Benefit Analysis. [online] Available at: https://www.treasury.nsw.gov.au/sites/default/files/2023-04/tpg23-08_nsw-government-guide-to-cost-benefit-analysis_202304.pdf.
10. ^ OECD (2021), Biodiversity , Natural Capital and the Economy : A policy guide for finance, economic and environmental ministers. [online], vol. Issue 26. Available at: https://www.oecd-ilibrary.org/docserver/1a1ae114-en.pdf?expires=1688010044&id=id&accname=guest&checksum=C0E9670D445A2C356F7BFAD805C8C4C7.
11. ^ Queensland Treasury (2019), The Queensland Government Guide to Better Regulation. [online] Available at: https://www.treasury.qld.gov.au/resource/queensland-government-guide-better-regulation/.
12. ^ Shrestha, RK, Seidl, AF & Moraes, AS (August 2002), 'Value of recreational fishing in the Brazilian Pantanal: a travel cost analysis using count data models', Ecological Economics. [online], vol. 42, no. 1-2, pp. 289-299. Available at: https://linkinghub.elsevier.com/retrieve/pii/S0921800902001064 [Accessed 29 June 2023].
13. ^ Smart, J, Hasan, S, Curwen, G, Ange, CS, Mcmahon, J, Jackson, S, Barber, M, Sinnamon, V, Burns, L, Fleming, C, Connolly, R & Burford, M (2022), Environmental economic accounting for interconnected assets and ecosystem services in the Mitchell River catchment , Queensland : Pilot ecosystem accounts and supporting information Final report.. [online], Griffith University. Available at: https://nesplandscapes.edu.au/wp-content/uploads/2022/08/Ecosystem-accounts-for-the-Mitchell-River-final-report.pdf.
14. ^ Thapa, S, Wang, L, Koirala, A, Shrestha, S, Bhattarai, S & Aye, WN (October 2020), 'Valuation of Ecosystem Services from an Important Wetland of Nepal: A Study from Begnas Watershed System', Wetlands. [online], vol. 40, no. 5, pp. 1071-1083. Available at: https://link.springer.com/10.1007/s13157-020-01303-7 [Accessed 29 June 2023].
15. ^ UN DESA (2022), UN DESA Policy Brief No. 144: Moving Beyond GDP and Achieving Our Common Agenda with Natural Capital Accounting. [online] Available at: https://www.un.org/development/desa/dpad/publication/un-desa-policy-brief-no-144-moving-beyond-gdp-and-achieving-our-common-agenda-with-natural-capital-accounting/.
16. ^ United Nations et al. (2021), System of Environmental-Economic Accounting— Ecosystem Accounting (SEEA EA) White cover publication, pre-edited text subject to official editing. [online] Available at: https://seea.un.org/ecosystem-accounting.

Last updated: 29 June 2023