The Measurement of Environmental and Resource Values

Theory and Methods

A. Myrick Freeman III, Joseph A. Herriges, Catherine L. Kling

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317703921
• Edition: 3
• Topic: Economics
• Subtopic: Environmental Economics
• Index: Economics

The first edition of this important work was the winner of the 2002 Publication of Enduring Quality award by the Association of Environmental and Resource Economists. The continuing premise for the book is that estimates of the economic values of environmental and natural resource services are essential for effective policy-making. As previous editions, the third edition, which includes two additional co-authors, presents a comprehensive treatment of the theory and methods involved in estimating environmental benefits.

Researchers, policy-makers, and practitioners will welcome the work as an up-to-date reference on recent developments. Students will gain a better understanding of the contribution that economics as a discipline can make to decisions concerning pollution control and human health, recreation, environmental amenities, and other critical issues concerning the way we use and interact with environmental and natural resource systems. To reflect recent progress in both the theory and practice of non-market valuation, the third edition includes more details on empirical approaches to measurement, expanded discussion of the reasons for divergence between "willingness to pay" and "willingness to accept compensation, " and increased coverage of econometric issues encountered in estimation. In keeping with its cutting edge orientation, it also includes more discussion of survey design, equilibrium sorting models, and the implications of behavioral economics for welfare measurements and benefit cost analysis.

Chapter 1

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Resource Evaluation and Public Policy

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The premise underlying this book is that estimates of the economic values of environmental and resource services can be a valuable part of the information base supporting resource and environmental management decisions. The importance of this premise is illustrated by a number of current environmental and resource policy issues, all of which involve in one way or another questions of economic values and tradeoffs. Consider these issues:

• Achieving the air and water pollution control objectives established by Congress requires massive expenditures on the part of both the public and private sectors. Is this diversion of resources from the production of other goods and services making us better off?

• Economists since A.C. Pigou (1929) have advocated placing taxes on emissions of air and water pollutants based on the damages they cause. What tax rate should be placed on these damages? How much do these rates vary across locations and time? An important related question is, are the gains from moving to pollution taxes greater than the costs of estimating the relevant marginal damages?

• The development of new reserves of petroleum and minerals is increasingly impinging on wild and natural areas that provide other environmental and resource services. Areas that might be affected include the Arctic National Wildlife Refuge, with its fragile habitat for caribou and other species, and the outer continental shelf, where commercial and recreational fisheries may be threatened by petroleum exploration and production. The 2010 oil spill in the Gulf of Mexico, and associated pictures on the nightly news of impacted wildlife, provided a cogent reminder that these same tradeoffs can occur in areas of existing production as well. Are restrictions on development in ecologically sensitive areas worth the costs they impose on society in the form of reduced availability of, and higher prices for, energy and minerals?

• The development and management of large river systems such as the Columbia River basin involves choosing among alternative combinations of hydroelectric power, water supply, and commercial and recreational fishing. There are also proposals to remove existing dams from many rivers. Are the ecological and recreational benefits of removing a dam greater than the costs in the form of reduced power generation and water storage? Is it worthwhile to curb water withdrawals for irrigation or reduce discharges for power production in order to protect populations of salmon and other migratory fish?

• The commercial exploitation of some natural resource systems may be proceeding at unsustainable rates. Examples include some tropical forests and many of the world’s fisheries. Shifting to sustainable rates of harvest may involve substantial short-term costs in the form of forgone incomes in order to achieve long-term increases in the flows of other ecological services. Are the long-term gains from achieving sustainable rates of harvest greater or less than the short-term costs?

• The scientific consensus is that substantial reductions in the emissions of greenhouse gasses will be required to slow or reverse the warming of the global climate. What degree of emissions reduction can be justified by the benefits of slowing or preventing global warming?

• Many people are now advocating that countries expand their system of national income accounts to include measures of the values of nonmarket environmental services, and deductions for the costs of environmental degradation and resource depletion. See, for example, Nordhaus and Kokkelenberg (1999).¹ How are these values and costs to be measured?

This book is about how, by providing measures of the economic values of the services of environmental and natural resource systems, economics as a discipline can contribute to answering questions such as these. We begin by introducing the idea of the natural environment as a set of assets or a kind of natural capital (Kareiva et al. 2011; Barbier 2011).

The Assets of Nature

Natural resources, such as forests and commercially exploitable fisheries, and environmental attributes, such as air quality, are valuable assets in that they yield flows of services to people. Public policies and the actions of individuals and firms can lead to changes in these service flows, thereby creating benefits and costs. Because of externalities and the common property and public good characteristics of at least some of these services, market forces can be relied on neither to guide them to their most highly valued uses nor to reveal prices that reflect their true social values. Externalities arise when a real variable (not a price) chosen by one economic agent enters the utility or production function of other economic agents. Inefficiencies can occur when there is no requirement to, or incentive for, the first agent to take the effect on others into account when making choices. An example is the level of emissions of smoke chosen by an electric generating plant when that smoke causes ill health to people downwind of the plant. A public good is nonexcludable and nondepletable—that is, once the good has been provided to one individual, others cannot be prevented from making use of the good, and one person’s use does not diminish the use that others can make of the good. It is the externalities and public good character of many environmental services that are responsible for the failure of the market system to allocate and price resource and environmental services correctly, and that create the need for economic measures of values to guide policymaking.

Benefit-cost analysis as the basis for making decisions about water resources investments came into its own more than 50 years ago. However, since the 1950s when the techniques of conventional benefit-cost analysis were being developed and refined, there have been significant changes in the nature of the problems being dealt with and the analytical tools that have become available. V. Kerry Smith called attention to these changes in his keynote lecture at Resources for the Future’s 35th anniversary celebration in 1987. He went on to say that

This expansion of applications has far-reaching implications for the techniques used and for the treatment of measures of the benefits and costs. Consequently, it has led me to argue for the use of a broader term, resource evaluation, to describe more adequately the amendments and expansions to benefit-cost methods in evaluating today’s environmental and natural resource issues.

(Smith 1988, 2)

One of the changes noted by Smith is the expanding range of resource and environmental management problems being subjected to economic analysis. As Smith pointed out, benefit-cost analysis was first developed to assess the net economic values of public works projects, especially water resource developments, that withdrew productive factor inputs (land, labor, capital, and materials) from the economy to produce tangible outputs (for example, hydroelectric power and transportation). Many of the outputs had market counterparts, so estimation of monetary values was relatively straightforward. For example, the savings in the monetary costs of repairing flood damages was taken to be a measure of the benefits of controlling floods. In contrast, today the effects of many public actions are much more subtle and wide-ranging. This is true for both the favorable effects (benefits) and unfavorable effects (costs and damages). What were once considered unquantifiable and perhaps relatively unimportant intangibles, such as improved recreation and visual amenities, are now recognized as significant sources of value. Also, consequences that were once unrecognized (for example, small changes in the risk of cancer) or were thought to lie outside the realm of economic analysis (say, loss of biodiversity and the preservation of endangered species and unique ecological systems), are often central issues in the analysis of policy choices today.

Another change is that the distinction between natural resources and the environment that has prevailed in the economics discipline for so long is often no longer meaningful. The objects of analysis for natural resource economists have typically been such resources as the forest, the ore body, and the fish species that produced a flow of commodities to the economy such as wood, metal, and fish sticks. The environment has been viewed as the medium through which the externalities associated with air, noise, and water pollution have flowed and, sometimes, as the source of amenities. Increasingly, this distinction appears to be artificial as we recognize both the variety of service flows provided by natural resources and the importance of a variety of forms of externalities. This recognition is apparently what Smith had in mind when he suggested the need to “model both natural and environmental resources as assets” (1988, 3) that yield a variety of valuable services. Freeman, Haveman, and Kneese had earlier suggested that we “view the environment as an asset or a kind of nonreproducible capital good that produces a stream of various services for man. Services are tangible (such as flows of water or minerals), or functional (such as the removal, dispersion, storage, and degradation of wastes or residuals), or intangible (such as a scenic view)” (1973, 20). Ecologists are now also adopting this perspective as they refer to “natural capital” and the values of ecosystem services (Prugh 1999; Daily et al. 1997; Daily et al. 2000; Daily et al. 2011).

As this change in perspective is adopted, it will be necessary to take a more expansive view of natural and environmental resources as complex systems with multiple outputs and joint products. The natural resource-environmental complex can be viewed as producing five kinds of service flows to the economy. First, as in the conventional view of resource economics, the resource-environmental system serves as a source of material inputs to the economy such as fossil fuels, wood products, minerals, water, and fish. Second, some components of the resource-environmental system provide life support services for people in the form of a breathable atmosphere, clean water, and a livable climatic regime. Changes in the flows of some of these life support services can be measured in terms of changes in the health status and life expectancies of affected populations. Third, the resource-environmental system provides a wide variety of amenity services, including opportunities for recreation, wildlife observation, the pleasures of scenic views, and perhaps even services that are not related to any direct use of the environment (sometimes called nonuse or existence values). Fourth, this system disperses, transforms, and stores the residuals that are generated as by-products of economic activity. This is usually referred to as the waste receptor service of the environment (Kneese, Ayres, and d’Arge 1970; Freeman, Haveman, and Kneese 1973). Finally, the resource-environmental system serves as a repository of genetic information that helps to determine the stability and resilience of the system in the face of anthropogenic and other shocks. Many of the services provided by natural resource-environmental systems can be characterized as direct services since their benefits accrue directly to people, for example, materials flows and life support services. Other environmental services could be better described as indirect services in the sense that they support other biological and ecological production processes that yield value to people. Examples include recycling of nutrients, decomposition of organic materials, generation and renewal of soil fertility, pollination of crops and natural vegetation, and biological control of agricultural and other pests.

A forest, such as a unit in the U.S. National Forest system, is an example of a resource-environmental system that provides a wide range of services, from materials such as wood and fiber to amenities like scenic vistas, hiking, and wildlife observation, and from the regulation of stream flow and control of erosion to the absorption of atmospheric carbon dioxide. In addition, since trees are known to emit nonmethane hydrocarbons, at least in some circumstances forests may contribute to the impairment of the life support services (Chameides et al. 1988). In the list of service flows there are examples of joint products—that is, pairs of services that can be increased or decreased together. However, often an increase in the flow of one type of service must be accompanied by a decrease in the flow of some other service, all things being equal. In other words, this system is characterized by scarcity and tradeoffs and requires a multipurpose approach to its management (Bowes and Krutilla 1989).

The economic value of a resource-environmental system as an asset is the sum of the discounted present values of the flows of all of the services. Since many of these service flows are not bought or sold in markets and therefore do not have market prices, the economic value of a natural asset may be quite different from its market value. For example, an acre of wetland might trade in the market for land on the basis of its value for commercial or residential development; but this value could be quite different from the value of its services as wildlife habitat and as means of controlling floods and recharging groundwater aquifers. It is important to emphasize, particularly to noneconomists, that in such a case the true economic value of this wetland includes both the marketed value as well as the nonmarketed ecosystem services.

The benefit of any public policy that increases the flow of one type of service is the increase in the present value of that service. However, the policy may have costs in the form of decreases in the flows of other services. Similarly, what is termed as damage due to pollution, or some other human intervention, is the reduction in the value of the flow of services it causes. All of these changes i...