ENVIRONMENTAL VALUATION IN PRACTICE

The integration of environmental gains and losses into either national accounts or CBA requires that they be converted into money terms, although it is recognised that these gains and losses would not in reality be bought and sold on the market.

Direct costs and benefits are the easiest to estimate. These might include estimating the value of production forgone because of environ­mental damage or the value of earnings lost through health problems associated with air and water pollution. However, direct monetary costs tend to underestimate the real costs and benefits provided by the environment. Improved health resulting from a cleaner and safer envi­ronment is worth more than just the medical bills saved, for example. A clean beach is worth more than just the value of having healthier beachgoers.

Measuring the values that people place on the environment is very difficult - some say impossible. For example, the reasons for preventing losses of species, and maintaining ecosystems and biodiversity, are many and wide-ranging; the social, ethical, aesthetic and cultural values of plants and animals have been recognised in religion, art and literature throughout history.

For most economists, however, the environment can be priced because all these values can be translated into the preferences of individ­uals. This is usually done in one of the three ways described below:

Willingness to pay (contingent valuation)

Market prices for environmental benefits are often derived from surveys. These surveys may ask people how much they are willing to pay to pre­serve or improve the environment (willingness to pay), or how much monetary compensation a person is willing to accept for loss of environ­mental amenity (willingness to sell). Values for 'willingness to pay' and 'willingness to sell' are based on surveys that are likely to be inaccurate, because people may inflate or deflate the amounts they are willing to pay or accept.

With willingness to pay (also known as 'contingent valuation'), it is thought that people will understate the amount they would pay if they think there is a chance they might actually have to pay that amount. This is because people know that if others pay and they do not they will get the benefit anyway - they can become 'free riders'. On the other hand, if people believe they will never be asked to pay up, they may exaggerate the amount they are willing to pay.

Surveys based on willingness to sell tend to obtain a much higher figure for what the environmental quality is worth (assuming people want a maximum price for something that they are selling). Willingness to sell surveys, therefore, tend to generate values that economists believe are too high. For example, surveys found that US households were willing to spend $100 each to prevent another disaster like the Exxon Valdez oil spill, but when they were asked how much money they would want before they would allow another spill to happen, not only were the sums much higher but many people said they would not allow it to happen no matter how much they were paid (Ackerman amp; Heinzerling 2004: 156).

Opportunity costs

Opportunity costs can be used to put a value on an area of the environ­ment which is to be preserved from development. To work out the opportunity cost for such an area, economists list all the possible alterna­tive activities that could take place in that area. For example, the value of preserving a wetland may be estimated by working out what the land would be worth if it were used for agriculture or housing. For each alter­native activity, the economist works out what benefits would have been gained that could not be gained in any other way and then subtracts the costs that would be involved in getting these benefits. So, for the housing alternative, the cost of building the houses and providing services for them would be subtracted from the value of the houses. And if those same houses could just as easily be built somewhere else, the opportu­nity cost would only consider the additional benefits from building them in the area being assessed.

The highest amount of net benefits (after subtracting costs) that one can get from any alternative course of action that has been forgone is the opportunity cost of preserving that area. This indicates the minimum value placed on the area, since the decision to preserve it has meant that those making the decision were willing to forgo at least those benefits, and maybe more.

This method can be used before a decision is made, so that decision makers or the public can decide whether they believe the area is indeed worth what has been worked out as the opportunity cost. If they decide not to preserve the area, environmental losses can be worked out in terms of the amount it would take to restore the environment to its orig­inal state after development has occurred - for example, after mining or logging. Environmentalists do not believe that all areas can be restored in this way, and thus reject this approach for not reflecting the full measure of environmental loss.

Opportunity cost can only be a partial measure of environmental value. The value of the area for housing may have no relationship what­soever to the ecological or aesthetic or spiritual value of the area it will be destroying. A wetland, for example, might be providing a breeding ground for fish and other aquatic organisms as well as performing a cleansing function, filtering out pollutants that flow through the area.

Using proxies (hedonic pricing)

This method assumes that the value of environmental assets can be found by considering the prices of the closest market substitutes. For example, a lake that is used for fishing, boating and swimming might be valued by calculating what people spend on private fishing, boating and swimming facilities. Another market substitute commonly used is prop­erty values. The idea is that houses in a polluted area will be worth less than houses in a non-polluted area, and part of the difference in house prices will reflect the value the market puts on clean air or on the cost of pollution.

Proxies are also used in the willingness to pay method to avoid asking people directly how much the environment or their health is worth. For example, a contingent valuation study was undertaken in North Carolina in the late 1990s to work out the value of a chronic case of bronchitis. The surveyors thought that if they asked people directly what they would pay to avoid getting chronic bronchitis they would get unrealistically high amounts because people would not actually have to pay the amount they stated. Instead, they asked shoppers in a shopping mall if they would prefer to live in a more expensive area, where the risk of getting bronchitis was lower, or stay living where they were, given a particular bronchitis risk. The interviewees were told what the effects of bronchitis were. The surveyors altered the cost of living and the risk of bronchitis until the shopper being questioned would be equally happy living where they were or moving to the new location with the lower risk of bronchitis. From this survey they calculated that a case of chronic bronchitis was worth $883000 to these shoppers. The results of that same survey were later used, with figures adjusted for inflation, to put a value on bladder cancer (Ackerman amp; Heinzerling 2004: 95-7).

The next chapter, chapter 8, evaluates the concept and practice of con­verting environmental value to a monetary value, be it through CBA or in order to integrate environmental assets into national accounts. Each of the principles outlined earlier in the book, apart from the polluter pays principle, will be applied to these methods.

Further Reading

Abelson, Peter (1979) Cost Benefit Analysis and Environmental Problems, Saxon House, London.

Ackerman, Frank amp; Lisa Heinzerling (2004) Priceless: On Knowing the Price of Everything and the Value of Nothing, The New Press, New York.

O'Neill, John (1996) Cost-benefit analysis, rationality and the plurality of values, The Ecologist 26 (3), May/June, pp. 98-103.

Pearce, David, Anil Markandya amp; Edward B Barbier (1989) Blueprint for a Green Economy, Earthscan, London.

Repetto, Robert (1989) Wasting assets: the need for national resource accounting, Technology Review, January, pp. 39-44.

Waring, Marilyn (1988) Counting for Nothing: What Men Value and What Women are Worth, Allen amp; Unwin, Wellington.