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 6 - Selecting a Technique
Chapters 1 and 2 introduced the challenges of managing the environment and the role of economics and economic values in helping to meet these challenges. As Chapter 2 emphasised, the pursuit of economic efficiency is one of the community's goals, so economic values are just one kind of information to be used in making decisions. Chapters 3 to 5 introduced the range of techniques available to value environmental effects and indicated a variety of Australian applications.
The tasks for the final part of the handbook are to:
- indicate which techniques might be applied to value particular environmental effects
- indicate the basis for selection of a technique, when several might be applied
- offer an overview of the usefulness of the techniques
- suggest the next steps to take in monetary valuation of the environment.
INTRODUCTION
The range of techniques available to value environmental effects has been reviewed and illustrated in Chapters 3, 4 and 5. This chapter offers suggestions on how to choose between the techniques on the basis of:
- suitability to value specific kinds of effect
- the need to use a range of techniques for any given project
- validity
- requirements for data and skill.
SPECIFIC TECHNIQUES FOR SPECIFIC EFFECTS
The techniques have been described in terms of the data that each needs and illustrated in terms of the kind of environmental effects that each can value. It shows that some techniques are better suited to particular kinds of effects. As the table also illustrates, few techniques are suitable to value non-use benefits. Many are available to value pollution effects and some techniques have wide applications. All the environmental effects can be valued by at least three techniques.
A WIDE RANGE OF EFFECTS
Most projects cause many benefits and costs; ideally, all of them would be given a monetary value. For example, a project to store water and allow a wetland to remain in its natural state will provide non-use benefits from the retention of the natural state. It may also provide irrigation water, change flood risks, change salinity patterns and have many other effects. Hundloe, McDonald et al. (1986) illustrate the wide range of effects from this sort of project and show how a wide range of techniques must be used to value them.
The market prices should be checked to ensure they represent true social benefits and costs following the guidelines in the Handbook of Cost-Benefit Analysis (Department of Finance 1991).
Table 6.1: Relevance of techniques to value specific environmental effects
Resource Pollution Recreation Natural Work Non-use
degradation amenity Environment benefits
Technique
Market value
approaches
Change in productivity .. . . ..
Change in income .. ..
Replacement cost . . .
Preventative . .. .. .
expenditure
Relocation cost . . .
Surrogate market approaches Travel cost .. .. Property value .. .. . . Wage differential . Proxy good . .
Simulated market approaches Contingent valuation . . . .. Trade-off game . . . . Contingent ranking ? ? ? ? ? ? Priority evaluator . .
Adapted from Izmir 1993.
.. highly relevant
. relevant
? possibly relevant
Effects Technique Notes
1. Maintenance of natural Contingent valuation or Check market validity of state of wetland contingent rating values obtainedAfter Hundloe et al. 1986.
2. Increase in irrigation Change in productivity Ensure only extra benefits output are valued
3. Increase in recreation Travel cost As above
4. Increase in aesthetic (a) To nearby landholders: There may be other groups benefits change in property value who receive aesthetic (b) To recreationists: already benefits captured by travel cost
5. Improved access due to Monetary value of reduced better roads travel time and reduced repairs
Table 6.3: Valuation of cost
Effects Technique Notes
1. Acquire agriculture land Market price of land for storageAfter Hundloe et al.1986.
2. Construct dams, banks Market price of materials, etc labour and capital
3. Relocate roads which Relocation cost will be flooded
4. Short-term unpriced Preventative expenditure Effects including noise, dust effects of construction where avoidance is possible and traffic congestion
5. Annual operating and Market prices maintenance costs
6. Increased flood risk Replacement cost of assets damaged due to flood
7. Increase salinity of Change in productivity, loss If land can be restored, use farmland in output replacement cost
SELECTION OF A TECHNIQUE
Where several techniques are suitable, the choice between them can be made in terms of:
- theoretical validity
- market validity
- data requirements
- skill requirements.
The validity tests have been discussed in Chapters 3 to 5 so the results for each technique are summarised as high, mid or low validity. The data requirements are reviewed in the table in terms of the overall data requirements (high, mid or low) and whether an extensive survey is needed to collect the data (yes or no). As the table indicates, data requirements tend to be high when surveys are needed but are low when market prices or costs can be applied. The requirements for skill are assessed in terms of the need for specialist statisticians to analyse and interpret the results (yes or no) and the apparent availability of Australian experience and expertise (high, mid, low).
Where several techniques appear suitable to value a given effect, the preferred method would normally be that with higher validity and lower data and skill requirements.
Until now Australian decision makers have often focused on contingent valuation. There is a need to use more of the techniques and to gain experience with more applications.
In cases where there are limited time and resources, the use of a benefits transfer approach may be applicable. In essence, this approach draws on existing valuation studies. Benefits obtained in past studies of similar sites are transferred to the site in question. These estimated benefits can be adjusted for assumed biases in the original studies, differences in socio-economic characteristics, extent of substitute goods and services and differences in the policy or project (see OECD 1994). In applying this approach, the New South Wales Environment Protection Authority's database on valuation studies could prove extremely useful.
Table 6.4: Selection of a technique
Theoretical Market Data Survey Special Level of
validity validity needs required? statistics domestic
needed? expertise
Technique
Market value
approaches
Change in productivity high high low no no high
Change in income low high low no no high
Replacement cost low high low no no high
Preventative high high mid yes no low
expenditure
Relocation cost low high low no no high
Surrogate market
approaches
Travel cost mid high mid yes yes high
Property value high high mid yes yes mid
Wage differential high high high yes yes low
Proxy good low low low no no low
Simulated market
approaches
Contingent valuation high low high yes no high
Trade-off game high low high yes no low
Contingent ranking high low high yes no low
Priority evaluator high high high yes yes low
Adapted from Izmir 1993.