Techniques to Value Environmental Resources:
an Introductory Handbook
Published as a joint exercise by the
Commonwealth Department of the Environment, Sport and Territories,
the Commonwealth Department of Finance,
and the Resource Assessment Commission
Australian Government Publishing Service, 1995
Chapter 1 The need to manage the environment
THE CHALLENGE FOR MANAGERS
All human activity relies on the natural environment. Environmental resources-rivers, the oceans and beaches, the land, the air, the diverse species of living things-are put to different and sometimes competing uses by people. They form the ecological processes on which life depends, they provide inputs to the production of goods and services, and they act as sinks for waste and pollution. They have uses which are not obvious or which we do not fully understand.
Environmental resources also have value beyond their direct use. For example, some resources are important for cultural, religious or scientific reasons. There is a widely held view that humans should act as stewards of the planet's resources, serving the interests of future generations. Another argument proposes that the natural environment has inherent value, independent of human use.
For these reasons, we must manage the natural environment in ways to ensure its survival and best use over time.
People make a variety of claims on the environment. In some cases, different uses for environmental resources are complementary or, at least, do not conflict. For example, with proper management rivers can be used for fishing, general recreation, water supply to households and industry. In other situations, it may be impossible to combine different uses of resources. Mining, logging or some tourism activities may not be consistent with the preservation of an area as a wilderness reserve.
Deciding who should use environmental resources how, where and when is complex. Decisions must weigh the values, variously perceived, of the resources and the compatibility of their potential uses.
THE NEED FOR INFORMATION
Many environmental resources are not traded in markets and so do not have an obvious price. There is a danger, therefore, that the effects of human activity on the natural environment will be ignored. If they are not fully taken into consideration there is a danger that the decisions made will not be in the best interest of society. This is especially important in government decision-making which is centrally concerned with the community interest (see Box 1.1)
Box 1.1: Measuring the environmental effects of government decisions
Many government decisions affect the environment either directly or indirectly. Government decisions to build roads or dams, change tax policies, implement training schemes, approve developments or allocate budget expenditures will have numerous different impacts, some that are easy to assess, some that are not.
For example, when a government decides to build a dam, the monetary costs of wages, materials, and land are relatively easy to calculate. However, construction may also affect local ecosystems, flood native forests, destroy platypus habitat, alter fish migration patterns or reduce the risk of flooding. These environmental effects are not easy to measure in biophysical terms or to value in monetary terms. While these effects clearly have value to society, they are not traded in markets and as such are not priced. For this reason, the do not show up directly in financial analyses and are often ignored. If the decision to build the dam ignores these environmental effects, the alternative chosen may not be the best one and may even impose costs on society that are greater than the benefits.
Inaction can also effect the environment. While there may be a short-term financial benefit from doing nothing to improve sewage treatment at ocean outlets, for example, in the long-term such inaction may harm society.
Though environmental effects do not have a price, that does not mean they do not have value. This is the difference between financial analysis-which is concerned only with goods and services traded in markets-and economic analysis-which is concerned with society's well-being or welfare. If we are concerned with people's welfare, we must fully consider environmental effects.
Failure to account for environmental values will have one of three results:
- The net environmental effect could be negative-degradation of natural resources through over-exploitation, excessive pollution or irreversible losses of natural capital may occur.
- The net environmental effect could be positive-there could be under-investment in or under-utilisation of the environment's productive capacity. For example, in deciding the budget for tree planting programs, governments would spend too little if they only valued trees for their visual amenity and ignored the other environmental benefits of trees as windbreaks, conservers of water and wildlife habitat.
- The net environmental effect could be neutral-the value of degradation is the same as the value of use. In this case, decision makers need consider only non-environmental factors, such as budget or equity concerns, in making their decisions.
Box 1.2: The effect of ignoring values for environmental resources
Environmental resources will be depleted if their value is ignored or perceived to be low. Until relatively recently, little was know about the life-supporting properties of the ozone layer or the effects of particular chemicals on this layer. Use of chlorofluorocarbons was seen as beneficial because of their many applications, such as propellants in spray cans.
Once it was discovered that the ozone layer was thinning and that this posed serious risks, governments took steps to reduce the use of ozone-depleting chemicals. Governments decided that the cost to society of using the chemicals exceeded their benefits. Because the environmental damage was not recognised and valued in the original decision to use the chemicals, a resource -the ozone layer- has been degraded with potentially serious effects on society.
INTEGRATED DECISION-MAKING
Decisions concerning the environment always involve benefits and costs, some with monetary values and some without. Ideally, decisions are made where the benefits outweigh the costs. Where environmental resources are affected by the decision, monetary values need to be weighed against non-monetary values.
Individuals make decisions which balance monetary and non-monetary values all the time. In deciding on an education for their children, parents may weigh the perceived benefits of more expensive schools against the extra costs. When deciding to buy an environmentally preferred product which may cost more than the alternative, a shopper will consider whether the perceived environmental benefit is worth the extra cost.
In decisions with broader social impacts, it becomes harder to make this analysis. Not only are non-monetary values to be calculated but also costs and benefits accrue to more than one individual or organisation. In such cases, there is a need to consider how values which may not normally be expressed in monetary terms can be included in the decision-making process to ensure that the choice made is best for society.
Environmental values can be handled in decision-making in several ways (see Box 1.3).
They could simply be omitted. However, environmental effects and society's recognition of them are now sufficiently important for their omission to be unacceptable.
Mere recognition that environmental values exist is also insufficient, particularly when they are significantly affected.
While a descriptive list of benefits and costs is an improvement, it may be overlooked in the process of policy development and appraisal because it is separate from the list of monetary benefits and costs.
Box 1.3: Ways of integrating environmental values into decisions
Omit them Consider only monetary values and risk making decisions
which disadvantage society.
Recognise them Make no attempt to value or integrate them into
decisions.
Describe them Present a descriptive list alongside the list of
monetary values.
Make a qualitative Describe the non-monetary effects and compare them
comparison with the monetary and non-monetary effects. For
example: Are the monetary benefits of a decision
worth the non-monetary costs? Are the monetary costs
less than the non-monetary benefits of the decision?
Make a quantitative,
non-monetary assessment Assess and record effects in non-monetary units.>
Make a quantitative,
monetary assessment Evaluate in money terms as many effects as possible
and integrate them in the decision. Describe and
record the remaining effects.
Qualitative comparisons, in which the decision maker explicitly compares the environmental effects with the relevant monetary values, are a more substantial step toward integration. They explicitly confront the balance between those benefits and costs with monetary values and those without.
This approach is appealingly simple and is a substantial improvement over descriptive lists but it too can lead to difficulties. For example, qualitative descriptions:
- lack a common numerical basis for comparison with the monetary benefits and costs
- lack monetary information for important environmental effects and so allow arguments to rest on generalities
- provide no clear record of how the decision was reached or how benefits and costs were weighed.
Despite these difficulties, qualitative comparisons could lead to more informed decisions than approaches based on descriptive lists and mere recognition of environmental values.
Quantitative assessments of the environmental effects of a proposal can be made in non-monetary or monetary units.
Many environmental effects can be described quantitatively in non-monetary units such as decibels of noise, tonnes of waste or concentrations of noxious chemicals. Biologists attempt to assess environmental amenities in terms of desirable attributes such as representativeness, species diversity, community structure, and energy and nutrient flows. Using such criteria, environmental amenities can be ranked. Such ranking can indicate the value of environmental attributes to society.
While provision of such information clarifies the effect of the proposal on the environment, it is hard to reconcile with effects evaluated in monetary terms. Further, some environmental effects cannot be described reliably in non-monetary units. So quantification in non-monetary units will allow only partial integration of environmental benefits and costs.
Quantitative assessment in monetary terms is a further step in the systematic comparison of benefits and costs of proposals.
Monetary valuation or measurement of as many values as possible in the terms of money forms the basis of cost-benefit analysis. This type of analysis attempts to measure all benefits and costs to society in monetary terms, and to identify proposals where benefits exceed costs.
Cost-benefit analysis is most appropriate if the policy or project under consideration is well-defined and well-contained. For example, a proposal to log a forest has quantifiable environmental impacts. However, in the case of a proposed policy to conserve biodiversity in Australia, a cost-benefit analysis becomes difficult due to the complex nature of the issue and the large number of links with other sectors of the economy. Further, conserving biodiversity has many inter-generational issues which cannot be handled easily within a cost-benefit framework.
Since monetary valuation of many environmental effects is so difficult, a complete cost-benefit analysis with monetary values for all environmental effects will rarely be possible. Even a full analysis would be an incomplete tool for policy makers. Decisions involve not only financial welfare, but also how welfare is distributed within a society and over the years. There are also some issues which are seen as being so fundamental to society that they are not appropriately within the realm of cost-benefit analysis. Cost-benefit analyses, even with full assessments of environmental effects, will only be a guide for decision makers and will not always be the optimal decision-making tool.
Box 1.4 summarises some important methods for assessing environmental effects. Each of these methods has a role in decision-making. Each identifies different aspects of a proposal, evaluates them and weighs them according to their importance, either implicitly or explicitly (when environmental effects are ignored, the implicit weight is zero).
This guide focuses on the use of monetary values in a broad cost-benefit framework which can be applied either to a specific project or to a wider assessment of policy options.
Box 1.4: Ways of gathering information
Several kinds of methods have been devised to assemble information to help make trade-offs explicit. They range across disciplines because they draw on a variety of information. Each has its niche and each incorporates economic values.
Cost-benefit analysis focuses on the criterion of economic welfare or well-being. Advantages and disadvantages of an option are measured in monetary values. The method is widely used in Australia. The extent to which environmental values are incorporated varies considerably.
Social impact analysis assembles and presents information on economic, social and cultural effects. So far its use in Australia has been limited.
Opportunity cost analysis presents financial costs and benefits on the one hand, and non-financial costs and benefits on the other. The analysis then presents non-monetary impacts in terms of the unit change per dollar.
Scenario analysis constructs future scenarios through 'what if ' questions. For example, what would be the implications of a 50 per cent increase or decrease in the area of national parks? The method is used more often in the corporate sector than the public sector.
Multi-criteria analysis assesses options on several criteria. Each advantage and disadvantage is measured on each criterion according to quantitative or qualitative indicators and table of effects is compiled.
Mathematical modelling techniques such as linear programming can incorporate environmental effects into financial analyses through imposition of ecological constraints in formulating models.
The Role of Monetary Valuation
In recent years, progress has been made in defining environmental values and effects, in techniques for estimating their monetary values and in defining the role of valuation in policy formulation. In some cases, values obtained from these techniques have been instrumental in the decision-making process and have led to some important and possibly unexpected results as illustrated in Box 1.5.
However, as indicated in the previous section, monetary valuation is only one way of integrating environmental effects into decision-making. It has its limitations and will not always be the most appropriate technique. It will never be a complete answer to the problem since there are many issues which cannot be addressed through monetary valuation. However, it can be a particularly powerful method when the necessary conditions for its effective use are present.
Monetary valuation techniques are described in Part Two of this book to show how valuations, under appropriate conditions, can provide decision makers with useful information.
Box 1.5: How environmental valuation can guide choices
The following three cases illustrate how the valuation of cost and benefits can be instrumental in the choice between competing uses of resources.
A proposal for a major hydro-electric dam was shelved when valuation showed that the benefits of preserving the river environment exceeded the benefits from power generation.
The annual budget for a soil conservation agency was increased after valuation demonstrated considerable community benefit from maintaining the soil.
Valuations of household and agriculture benefits of a proposed water-supply pipeline showed costs to exceed benefits. The proposal did not proceed.