Session 2 Valuation methods 1 TEEB Training Approaches

Session 2: Valuation methods 1 ©TEEB Training

Approaches to Valuing Ecosystem Services q Direct market valuation approaches: use data from actual markets q Revealed preference approaches: economic agents “reveal” their preferences through their choices q Stated preferences approaches: simulated markets where values are sought for changes in provision or policy ©TEEB Training

Direct market valuation: Market-based q Market price based approaches – Most often used to obtain values for provisioning services – Preferences and marginal cost of production are reflected in market price – In well functioning markets, price provides accurate information on value ©TEEB Training

Direct market valuation: Cost-based q Cost based approaches – Costs incurred in recreating an ecosystem service artificially § Avoided cost method § Replacement cost method § Mitigation or restoration cost q Appropriate for regulating services ©TEEB Training

Direct market valuation: Production function q Production function approaches – Estimates contribution of an ecosystem service to a final commodity – Improvement in resource base or environmental quality, i. e. enhanced ecosystem services, lowers costs and prices or increases quantity of goods – Requires knowledge of relationships between ecosystems services and valued end points q Applicable to regulating and supporting services ©TEEB Training

Direct market valuation: limitations q Lack of markets for ecosystem services q Markets are distorted q Replacement cost approach can overstate values q Production function approaches have specific problems: – Lack of data/knowledge of cause-effect relationships – Interactions across ecosystem services increases likelihood of double counting ©TEEB Training

Revealed preference q RP methods are based on observations of individual choices related to an ecosystem service q Appropriate for direct and indirect use goods q Stages 1. 2. 3. 4. 5. 6. Determine existence of surrogate market for ecosystem service Select appropriate RP method Collect market data to estimate demand function Infer value of change in quantity/quality from demand function Aggregate values Discount values where appropriate TEEB Training

Revealed preference: Travel Cost Method q Travel cost method (TCM) – The value of an environmental good is reflected in the time and money people spend getting to it e. g. forests, mountains, fishing sites – Based on actual behaviour, mostly used for recreation studies – Visitor surveys are used to determine distance travelled to site, values are estimated from cost per mile or per hour spent travelling – Travel costs are used to estimate the number of visits made – Only direct use values are estimated q Appropriate for cultural services TEEB Training

Revealed preference: Travel Cost Method cont… q TCM practical issues – Functional form – Multipurpose trips: • ‘Meanderers’ may visit several sites during a trip • ‘Purposeful visitors’ visit only one site – Holidaymakers and residents: • Holidaymakers may have high overall costs but low site visit costs • Residents have lower travel costs, but may in fact value the site highly • Some form of weighting required to account for these – What costs to include? • Total cost of travel, marginal cost of visit, value to time TEEB Training

Travel cost method: example q Nam and Son (1991) – Recreational value of the Hon Mun Islands Vietnam – Marine Protected Area established in 2001 with US$2 m funding over 4 years – Proposal to expand port at Nha Trang City with impacts on water quality and marine ecosystems Source: Google Maps TEEB Training

Travel cost method: example q Both domestic and foreign visitors to Hon Mun were surveyed and zonal TCMs estimated – 10 domestic zones, 3 international zones – In 2000 there were 397, 000 domestic and 118, 700 foreign visitors TEEB Training

Travel cost method: example q TCM value estimates (1 US$ = 14, 500 VND) Consumers surplus Price paid Recreational value All Per Visitors Visitor (US$) (US$m) Domestic 1. 49 8. 96 2. 46 15. 16 3. 95 22. 74 visitors Foreign visitors 1. 64 Total 3. 13 17. 22 31 14. 77 129. 53 13. 95 146. 76 17. 90 TEEB Training

Revealed preference: Hedonic pricing q Hedonic pricing (HP) – The value of a good is a function of its characteristics, e. g. house prices (or rents) are determined by a number of attributes: • Structural: number of rooms, garden size, garage size, central heating, double glazing… • Socio-economic: quality of schools, unemployment rate, local taxes… • Local amenities: access to services, transport links, environmental quality… TEEB Training

Revealed preference: Hedonic pricing q HP practical issues – Values of those not in property market – Large amounts of data are required to determine the values of individual attributes, and needs active market – Omitted variable bias: important explanatory variables may be missing from data – Housing markets tend to be segmented, i. e. several hedonic models may have to be estimated – Variables may be correlated, e. g. houses near quarries suffer from both noise and dust – Hedonic models often have very complex functional forms TEEB Training

Hedonic Pricing: example q UK Defra study on effects of proximity to landfill sites on house prices http: //archive. defra. gov. uk/environment/waste/strategy/le gislation/landfill/documents/landfill_disamenity. pdf TEEB Training

Hedonic Pricing: example q Types of disamenity from landfill: – noise, dust, litter, odour, vermin, visual intrusion, perception of risk q Housing variables used: – – – – bedrooms bathrooms type of house (8 classes) car parking space, single garage, double garage partial central heating, full central heating floor area age (5 classes) TEEB Training

Hedonic Pricing: example q Used a GIS database of 592, 000 mortgage transactions – contained data on house values, characteristics, location – 1990 to 2000 period – 11, 300 landfill sites - 6, 100 operational q Models estimated separately for counties (sub-regions) to account for differing property markets q Hedonic model captured 80% of the variation in house prices, variables had “right” signs TEEB Training

Hedonic Pricing: example TEEB Training

Hedonic Pricing: example q Average reduction in house prices of £ 5, 500 within 0. 25 miles of landfill and £ 1, 600 between 0. 25 and 0. 5 miles q Average total UK disamenity = £ 2, 483 m q Between £ 334, 350 and £ 478, 990 per landfill site q Between £ 1. 52 and £ 2. 18 per tonne of waste TEEB Training

Hedonic Pricing: example q How are these results used? – Inform landfill tax levels - initially £ 15/tonne for active waste – Inform planning decisions – Feed into CBA on landfill siting decisions • mitigation actions • financial costs of alternative sites – Potential for compensation? • Some evidence of reduction in dis-amenity effects over time TEEB Training

Revealed preference: limitations q Market imperfections and policy failures q Large, good quality data sets required q Expensive and time consuming q Omits non-use values q Sensitive to assumptions made on relationship between ecosystem service and surrogate market TEEB Training

Stated preference q SP approaches use simulated markets to elicit willingness to pay (WTP) or accept (WTA) values for changes in ecosystem service provision q Appropriate for both use and non-use values – May be difficult to segregate these value motives from WTP q Survey based methods in which respondents are presented with a hypothetical market describing the change in service provision TEEB Training

Stated preference Summary on methods covered q Contingent valuation method One policy-on scenario compared with Business As Usual (BAU) q Choice Experiments Attributes are compared, e. g. ‘visibility in the sea’ Some baseline BAU level for each attribute and this is compared with varying levels (with policy-on) q Group valuation Less commonly applied – links valuation with deliberative methods TEEB Training

Stated preference: Contingent valuation q Contingent valuation method (CVM) q A hypothetical market is described in which respondents either buy (WTP) or sell (WTA) a specified level of an environmental good or service q The values which are elicited are “contingent” on the hypothetical market with which respondents are presented TEEB Training

Stated preference: Contingent valuation cont… q Large differences between WTP and WTA for the same good, neoclassical economic theory suggests they should be near equal – Loss aversion and implied property rights - ownership makes a commodity more valuable – Absence of substitutes – Irreversibility – Income and budget constraints TEEB Training

Stated preference: CVM process I q Survey design – Start with focus groups and consultations with stakeholders – Decide the nature of the market – Determine the quantity and quality of information provided for the good – Set allocation of property rights § WTP or WTA – Determine credible scenario and payment vehicle (tax, donation, price). – Choose elicitation method (e. g. dichotomous choice vs. openended elicitation method). TEEB Training

Stated preference: CVM process II q Survey implementation and sampling – Interview implementation: face-to-face, mail, telephone, internet, groups – Interviewers: private companies, researchers – Sampling: convenience sample, representative and stratified sample TEEB Training

Stated preference: CVM process III q Calculate measures of welfare change – Open-ended – simple mean or trimmed mean (with outliers removed ) – Payment cards/ladders – Bidding games – Dichotomous choice – estimate expected value of WTP or WTA TEEB Training

Stated preference: CVM process IV q Technical validation – Estimating a bid function – Testing the validity and reliability of the estimates produced TEEB Training

Stated preference: CVM process V q Aggregation and discounting – Calculating total WTP from mean/median WTP over relevant population – for example by multiplying the sample mean WTP of visitors to a site by the total number of visitors per annum. – Discount calculated values as appropriate. TEEB Training

Stated preference: CVM example q 1989 Exxon Valdez spilt 11 million gallons of oil in Prince William Sound, Alaska. q CVM study was carried out to estimate passive use value (existence, bequest) loss to US citizens. q WTP values sought for policies to prevent similar spills in future. q WTA would have been correct measure. q Estimated total loss was $2. 81 bn TEEB Training

Contingent valuation method: example • Bann (1999) – Survey of 300 households’ WTP for mangrove protection in Benut, Malaysia (243 useable responses) Source: Google Maps TEEB Training

Contingent valuation method: example q 56% of respondents stated a positive WTP, of those who didn’t 49% gave protest responses, meaning that q Payment ladder and dichotomous choice elicitation methods were used – The payment ladder asked respondents to tick values they would pay and cross values they wouldn’t Mean US$18 US$61 Median US$10 US$30 TEEB Training

Stated preference: Choice modelling q Choice modelling (CM) – Also referred to as choice experiments (CE) – Type of conjoint analysis – Survey respondents make choices across environmental goods with varying bundles of attributes – Trade-offs between attributes reveals their values – Can combine qualitative and quantitative attributes TEEB Training

Stated preference: Choice modelling q CM issues: – Requires specialist statistical design (and software) and sampling resources – Choice tasks can be complex – Potentially complex analytical task – Inclusion of socio-economic and attitudinal variables is not straightforward TEEB Training

Choice Modelling: example q Valuing quality changes in Caribbean coastal waters for heterogeneous beach visitors (Beharry-Borg and Scarpa, 2010) q Most locals do not snorkel or dive. In order to ensure that the valuation captured both locals and non locals two groups were Identified snorkelers and non snorkelers. q Most valuation studies in the Caribbean have focussed on obtaining WTP values for attributes associated with snorkelling and scuba diving q There were 9 attributes in the snorkeler subsample and 6 in the non snorkeler subsample plus a cost attribute q Cost was described in terms of a contribution cost to an NGO TEEB Training

Choice Modelling: example Attributes 1. Number of boats near the coastline Nonsnorkelers 2. Presence of a marine protected area 3. Level of coastline development 4. Average bathing water quality 5. Level of vertical visibility Snorkelers 6. Number of plastics per 30 m 7. Contribution fee 8. Number of snorkelers per group 9. Level of coral cover 10. Number of fish seen while snorkelling TEEB Training

Choice Modelling: example No Policy High Policy Low Policy TEEB Training

Choice Modelling: example • 198 (snorkellers) and 86 (non-snorkellers) = 284 respondents TEEB Training

Choice Modelling: example q Individual-specific WTP estimates (TT$ ~ 0. 16 US$) for snorkelers Class one (61%) Class two (39%) Up to 60 fishes 35 5 Up to 45 % coral cover 50 10 Vertical visibility of up to 10 m 40 10 Marine Protected Area which allows fishing 33 7 Marine Protected Area which prohibits fishing 34 10 Plastics of up to 5 pieces 15 50 Low chance of ear infection 22 25 Low level of development 15 40 1 TT$ ~ 0. 16 US$ TEEB Training

Stated preference: Group valuation q Group valuation – Combination of stated preference techniques with deliberative techniques – Offer a deeper exploration of environmental information, values and preference formation – Trade-off of smaller groups versus survey approaches versus more precise values TEEB Training

Stated Preference: Limitations q Sometimes the only way to capture non-use values q Hypothetical nature of the markets: do the decisions correctly reflect real-life behaviour? q Divergence between WTP and WTA estimates (theoretically equal) q Insensitivity to scope and scale q Are the different values comparable to a common metric? q Goods are complex – is there a need for pre-valuation workshops so that respondents can better understand their preferences? TEEB Training

Comparisons between approaches: Marketbased Advantages Market prices • Reflect private WTP • Construct financial accounts • Easy to obtain Disadvantages • Market imperfections and policy failures distort prices • Seasonal variations • Currency variations Shadow prices • Reflect true economic value or opportunity cost to society • Complex to derive • Require substantial data • Considered ‘artificial’ Production function • Links ecosystem functions to market values • Requires modelling of dose response relationships • Complex for multi-use systems • Potential double counting TEEB Training

Comparisons between approach - costbased Advantages Disadvantages Mitigation/ restoration costs • Useful when valuing particular ecosystem functions • Diminishing returns and difficulty in restoring functions Replacement costs • Estimates indirect benefits when ecological data not available for estimating damage functions • Net benefits of replacement may exceed original function • May overstate WTP Avoided damage cost • Precautionary principle applied • Data or resource limitations may rule out first-best valuation methods TEEB Training

Comparisons between approach - Revealed and stated preference Advantages Hedonic pricing • Reflects private WTP • Based on observed behaviour Disadvantages • Data intensive • Requires defined surrogate market Travel cost • WTP for recreational sites • Based on observed behaviour • Data intensive • Restrictive assumptions about behaviour • Sensitive to statistical methods Contingent valuation • Can measure non-use value and give estimate • Sensitive to biases in survey of TEV design and implementation Choice modelling • Simultaneously elicits values for a range of goods and services • Complex statistical design and analysis • Potential burden on respondents – choice heuristics TEEB Training

What do the methods capture? TEV and valuation methods Use values Direct Non-use values Indirect Option Existence Bequest Production Function Revealed Preference Stated Preference Value? Confidence? TEEB Training Value? Confidence? Market

Session Summary q Different methods available but variability in terms of: – Data needs – Categories of TEV valued – Confidence in value outcomes q Those that rely on market prices (or surrogates/ proxies) tend to only value a sub-set of ecosystem services TEEB Training

Group exercise q Returning to the gaps on value information you identified earlier, can you suggest which valuation methods might be appropriate to address the gaps? q Do any gaps remain? © 123 rf. com TEEB Training