Alternatives for Environmental Valuation

Michael Getzner, Clive Spash, Sigrid Stagl

• Publisher: Taylor & Francis
• Year: 2004
• eBook ISBN: 9781134389230
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Methods for raising awareness of how human's value the environment range from monetary valuation through to greater public participation in decisions. In this book a group of international experts explore innovative alternatives which are critically evaluated and compared. Lessons are drawn from both the successes and failures of different approaches. Case studies address a wide variety of cutting edge environmental problems from agro-forestry and wetlands to climate change, biodiversity and genetically modified organisms.

1 Exploring alternatives for environmental valuation

Clive L. Spash, Sigrid Stagl and Michael Getzner

Introduction

The method of inclusion of environmental resources and ecosystem services in decision processes determines how far they are taken into account with results affecting the quality of our lives and those of future generations. A persistent argument has been that monetary valuation is essential if the ‘environment’ is to have any chance of being included in government and business decisions. Environmental cost–benefit analysis (CBA) was developed by environmental economists in order to achieve this monetisation of environmental entities so that the prices in market economies might be adjusted. A range of methods were developed including travel cost, hedonic pricing, production function analysis, contingent valuation and choice modelling (see Hanley and Spash 1993; Spash and Carter 2002). The overall aim has been to select project options on the basis of their welfare impacts and to support government taxes which reflect the social costs of environmental degradation. This approach has met with some success in that various national and international agencies have been interested in performing monetary valuation exercises as part of their overall assessment of projects. The idea of environmental taxation has also risen on the political agenda if remaining limited in practice.¹

However, there has also been criticism of environmental CBA, or more specifically of some of the studies conducted under that guise. Critiques can be broadly grouped into those concerned with the theoretical foundations of economic values, and those looking at the validity of specific numbers being produced and the tools employed. In the former case, Kapp (1950) provides an isolated early example which shows the limits to monetary as opposed to other values in society. More recently, environmental philosophers have produced a whole body of literature showing the narrowness of value theory typically expressed by economists and the failure of economic training to place this theory in the context of wider social values (see O’Neill 1993). Reflecting upon this literature requires realising that most economics concerns consequentialism using a form of preference-based utilitarianism, which is a very specific philosophy of value rather than a generally accepted meta ethic which can be universally applied. In trying to address the environmental problems of the 20th century, economic value theory has shown itself lacking in several areas, such as the treatment of time, complexity, strong uncertainty, political systems, rights and social norms. The enhanced Greenhouse Effect raises all these issues and exposes the failures of discounting, partial equilibrium analysis, risk assessment and assuming that efficiency is the key social goal (Spash 2002b).

The other area of critical analysis abstracts from the first set of problems and tends to be a debate on validity which has been largely internal to the economics profession (although implications of the value debate are also related via theoretical foundations). Validity concerns result in specific applications being criticised for their failure to respect microeconomic and welfare theoretic constraints. Those working within decision making government institutions, such as environmental protection agencies or the treasury, may see such theoretical restrictions as academic and going beyond what is required for practical policy making (for example, see comments by Burney 2000). However, once valuation becomes divorced from its theoretical roots, numbers can be produced which have little content or meaning, and are defensible only in terms of their political role rather than their theoretical basis. In this respect the popularisation of environmental CBA has been a problem as studies proliferate, numbers are transferred out of context and applications seek to meet policy desires. Excessive aggregation is exemplified by attempts to value regional, national and even the world’s ecosystems, although what is meant by a trade price in these contexts is mystifying, and asking who might be the ‘seller’ and ‘purchaser’ exposes the fallacious use of economic value theory. Furthermore, the range of reasonable numbers stemming from monetisation exercises is often very broad, which facilitates the arbitrary use of valuation results.

The contingent valuation method (CVM) has become the most widely conducted CBA tool. The main advantage attracting this attention is the ability of CVM to estimate what are termed option, ‘existence’ and bequest values in addition to direct use values. These are amounts reflecting: the preservation of an option to use a resource in the future, the maintained existence of a resource or entity regardless of personal use, and the desire to pass the resource to one’s descendents. The sum of these indirect or passive use values can be large compared with the direct use values associated with non-market goods to which the other CBA methods are solely restricted. The popularity of the CVM is also based upon the apparent simplicity of asking members of the general public the maximum they are willing to pay (WTP) for an environmental improvement or, less commonly, the least they would be willing to accept (WTA) in compensation for environmental degradation. Considerable research energy has gone into refining CVM and related stated preference approaches. The result has been to increase the complexity and cost of conducting a CVM if it is to attain the highest standards of validity. In the United States of America this is the legally defensible standard which can cost millions of dollars for a nationally representative random sample including a range of pretests, focus groups and internal consistency and validity checks in the survey, as well as several variations on survey design.

The litigation surrounding the oil spill from the tanker Exxon Valdez led to a set of such standards being produced by a panel of experts commissioned by the National Oceanic and Atmospheric Administration (NOAA). This panel consisted of a number of famous economists, such as Nobel Prize winners Kenneth Arrow and Robert Solow. The panel was also asked to investigate the concept of ‘existence’ value. The panel’s report gave a qualified support for the CVM (NOAA 1993). The panel stated that ‘existence’ values are a theoretically meaningful aspect of value. As regards the ability of the CVM to estimate such values, the panel noted five main problem areas: inconsistency of responses with economic models of rational choice; mental account bias, especially when respondents are inadequately informed as to substitutes; aggregating benefits; providing information; and warm glow effects. However, the panel felt that so long as certain guidelines were followed, CVM results could be judged as both meaningful and useful indicators of natural resource damages. These guidelines are that (i) WTP should be used in preference to WTA; (ii) mail surveys should be avoided; (iii) respondents should be given full information on the resource change (including information on substitutes), and be asked how well they understand this information; (iv) open-ended responses should be rejected in favour of closed-ended referendum formats; (v) a random population sample is required; (vi) respondents should be reminded about the need to reduce expenditure on some item of their budget in order to be able to pay their stated bid; and (vii) careful pre-testing should be carried out.

Such rules tend to be excessively prescriptive and ignore the specific context in which a valuation exercise must take place. There are certainly general design features in any contingent valuation study which are desirable. These include clear description of the institutional context, explaining the consequences and expected benefits of payment, being aware of various biases which can be introduced in design, such as use of a contentious bid vehicle, and generally producing a realistic scenario. Without addressing such issues any research which claims to be relevant to the economic debate will be seen as inadequate and may also be misleading. However, employing rules which prevent hypothesis testing and experimental design is more worrisome. The NOAA Panel holds an implicit belief in a single universal standard of best practice which ignores cultural, legal and institutional variation. People trade differently in different countries (e.g. haggling vs. accepting the stated price), property rights vary (WTP vs. WTA), areas of trade which are taboo differ, and truly random sampling is difficult at best and impossible in industrially developing countries. A serious concern here is the extent to which research designs which fail to conform to the rules are branded as poor practice when they may be valid research aiming to question the underlying tenets of the model. Blind use of highly specific guidelines can remove the room for original research, especially in the areas of economic psychology and human behaviour.

CBA, along with mainstream microeconomics, has been increasingly criticised for building upon an unsound theoretical base in terms of human behaviour and the CVM has made this even more evident. That is, the microeconomic axioms of choice make assumptions which are at best inconsistent with theories of modern psychology and empirical evidence. In the valuation area, Kahneman and Tversky’s (1979) prospect theory revealed that people value gains and losses asymmetrically and this can explain the observed gap between WTP and WTA measures. Knetsch (1994, 1995, 1999; also Knetsch and Sinden 1984) has shown the frequent occurrence of behaviours which are inconsistent with accepted economic norms but commonly dismissed by economic models. The refusal to make trade-offs has been shown to arise in CVM studies both amongst those who protest against the use of monetary valuation of the environment and also those prepared to make a contribution (Spash 2000b, 2002a, 2002c). The results can be linked to rights-based beliefs which contrast with those of the economic utilitarian (Spash and Simpson 1994; Spash 2000c). In terms of the economic model, the only way in which such behaviour can be characterised is as lexicographic preferences which are deemed, at best, to be held only by a strange minority (Spash 1998, 2000a; Spash et al. 2000). A range of techniques is therefore required to understand human psychology in terms of the attitudes, ethical beliefs and social norms which motivate behavioural responses.

Concerns raised about the practice of attaching monetary values to all dimensions of socio-economic and biophysical systems have led to the call for alternative valuation methods (Martinez-Alier et al. 1998). There has been a powerful argument for shifting away from the sole focus on outcome towards the quality of decision processes (Funtowicz and Ravetz 1990; O’Connor et al. 1998). In particular, multiple criteria assessment has become a more widely used method, offering the potential for the integrated assessment of local, national and international policies and as a means for combining different perspectives associated with sustainability goals. Sustainability raises a set of issues based on civil rights of current and future generations as well as respect for ecological systems. Understanding that biophysical as well as human systems are complex, and will never be fully understood, has led to the development of approaches which favour adaptive behaviour and learning processes over optimal solutions. Closely linked to this view is the acknowledgement of uncertainty of future events and their impacts on human and non-human systems. All these factors redefine the role of experts, the meaning of knowledge and how decision processes need to be designed to make more effective policy.

In the environmental policy arena, and elsewhere, there has been a push for greater public participation, e.g. in Europe the Aarhus Convention (European Commission 1998), and the inclusion of non-governmental stakeholders in project appraisal. Researchers are meeting this challenge both through interdisciplinary discourse and also by contributing to the formation of novel democratic institutions. There is both innovation in traditional environmental CBA and in terms of new political institutions for addressing valuation issues. In the former case are the range of techniques termed deliberative monetary valuation (Spash 2001), and in the latter such tools as the citizens’ jury. Research into the operational criteria for effective public participation is at an early stage of development.

The search for validity in applying CBA methods has lead to a variety of appeals to interest groups and/or members of the public in an attempt to supplement the normal information content of prices placed on the environment. Thus, the travel cost method may be combined with an interview approach in order to sustain assumptions of how individuals behave, value time and relate to the environment. Hedonic pricing has sought corroboration from estate agent valuations as representing ‘informed’ preferences. Focus groups have been used in conjunction with the CVM to test survey design on the basis that group deliberation could validate the information content and help identify design biases. This last approach is most clearly where deliberative practices have begun to enter. For example, the largest CVM study in the UK was conducted on environmental impacts associated with aggregates (Department of the Environment, Transport and the Regions 1999). An interesting feature of this work in the current context was the informal use of vested industrial interests (stakeholders) in the first part of the study and the use of public focus groups in the design stage of the second, although the feedback from the public proved problematic by diverging from economic assumptions (e.g. the expressed desire for community compensation unrelated to the individual), and neither process was formally reported.

Thus, two broad approaches to combining deliberation and monetary valuation can be identified. The first regards monetary valuation as basically sound but being able to benefit from supplementary, and often informal, processes borrowing elements of deliberation. The second sees the use of deliberative approaches as a new method allowing the (collective or individual) production of a monetary valuation for environmental goods and services. Under the first approach a variety of alternatives exists, and monetary valuation may be either followed or preceded by some element of deliberation. Stakeholder participation, as mentioned above, may be employed to validate outcomes. The implication being that ex post deliberations can be used in some way to adjust valuation results or their presentation. Deliberative processes and environmental valuation may also be sequential, e.g. selecting a sub-sample of participants from a CVM survey for a citizens’ jury on the same environmental issue. Ex ante deliberation has been employed in designing CVM surveys with the use of focus groups to test the wording and respondents’ understanding of survey questions. Deliberation is then regarded as useful in providing insight into the processes by which respondents produce their WTA or WTP bid. This may be extended to allowing a deliberative process to determine the options or institutional context to be valued in the survey.

The second approach is what Spash (2001) has termed deliberative monetary valuation (DMV) as advocated by, for example, Brown et al. (1995), Jacobs (1997), Ward (1999) and Kenyon et al. (2001). DMV is the use of formal deliberation concerning an environmental impact in order to express value in monetary terms for policy purposes, and more specifically as an input to CBA. For example, consider a proposal to build a new road through a wilderness area and so destroy the habitat of a number of rare or threatened species. A group of citizens would be selected and meet to discuss information about these environmental damages associated with the development. Known costs and benefits (discounted) would be presented, while those pertaining to environmental damages would be deliberated. The citizens would form a jury aiming to provide a monetary value for environmental damages which might be in terms of an individual WTA to allow the project to proceed. The result would then be incorporated into a net present value calculation to determine the viability of the project.

The meaning of such values remains contentious, as they are mediated individual values. In order to address the increasingly evident fact that preferences are formed and that there is a lack of arbitrage in valuing environmental goods and services, economists are appealing to methods from political science. However, approaches such as citizens juries and contingent valuation, or more generally deliberative forums and monetary valuation, differ in fundamental ways. This has been pointed out by Niemeyer and Spash (2001) as involving the approach taken to theoretical factors (individual and social ontology, preference basis, rationality theory), practical factors (justification, framing, value representation, institutional setting), and political factors (manipulation, representation, social impact). The variation between approaches to each of these factors means the very concept of DMV is brought into question. In simplified terms, can DMV take the best of both monetary and deliberative methods as advocates hope or does it merely create a messy confusion as to the values being expressed?

Clearly, research into valuation needs to span different disciplines such as social psychology, applied philosophy, political theory and economics. While interest in doing so seems to have increased, the quality of the applications can be questionable (Spash 2000b). Part of the problem is for economists to understand the requirements of other disciplines, while practitioners in those other disciplines must similarly have a good practical knowledge of what economists are trying to do. Thus, applying attitudinal measures from social psychology may prove insightful with respect to WTP, but only if researchers also understand welfare economics and CBA tools so that their work can address the economics literature. This is a challenging research agenda but one which, as several contributions in this volume show, is now being taken on at several different levels.

Contributions to the debate in this book

The book is organised around three major drivers influencing the field of environmental valuation, namely attempts at: understanding the results from environmental CBA and the foundations of economic behaviour, taking multiple values into account, and exploring the role for inclusive deliberation in valuation processes. The chapters reflect the debates over method development which are on-going in the valuation community. Clearly, all methods have advantages and disadvantages and there is no pretence on the part of the editors that any one approach offers a panacea. What the reader will find is the presentation of a range of attempts to learn from different disciplines in order to achieve practical approaches which can improve our understanding and expression of environmental values.

Economic values and the psychology of behaviour

Getzner begins the book by exploring epistemological and other theoretical problems in understanding economic values with a specific focus upon the CVM. What might be regarded as specific validity issues are addressed (i.e. hypothetical bias, framing of questions), but a different perspective is gained by placing these issues within the context which the social role respondents adopt when answering CVM surveys. The refusal to trade money for environmental change is raised as an important behaviour and related to the literature on lexicographic preferences (see for example Spash and Hanley 1995; Spash 1998; Spash et al. 2000). In addition, some of the literature on the supposed dichotomy of individuals as political citizens and economic consumers is discussed. This then provides the background to a range of variables for inclusion in bid curve analysis. The empirical test presented uses WTP for a nature preservation programme in Austria stated to be able to secure the survival of certain species and ecosystems. A convenience sample of 189 university students form ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Routledge Explorations in Environmental Economics
• Figures
• Tables
• Contributors
• Preface
• Acknowledgements
• Abbreviations
• 1: Exploring Alternatives for Environmental Valuation
• Part I: Extending the Environmental Valuation Approach
• Part II: Taking Multiple Criteria Into Account
• Part III: Deliberation, Participation and Value Expression