The economic value of biodiversity: a scoping paper

Professor Jeff Bennett
Asia Pacific School of Economics and Government
The Australian National University, October 2003

6. Valuation techniques

The range of biodiversity valuation techniques reviewed in this section is considered under three headings that reflect the continuum from pure market to pure non-market techniques. First, those techniques that are completely embedded in the markets for goods and services are reviewed. Second, techniques that rely on specific relationships existing between the biodiversity values under investigation and goods and services that are marketed are detailed. These are known as revealed preference techniques because peoples’ preferences for biodiversity protection are revealed through their actions in related markets. Finally, stated preference techniques are described. These are valuation techniques that require people to state the strength of their preferences – and hence reveal the values they enjoy – through structured questionnaires. They do not involve any reliance on market data.

Market based techniques

For market based valuation techniques, the benefit generated by biodiversity must be bought and sold in markets. Hence, the techniques are mostly suitable for application where direct use benefits are involved. Benefits arise for both consumers of biodiversity benefits and their producers. Observations of market supply (the marginal costs of suppliers) and price received through transactions recorded in markets allow the estimation of profits enjoyed by producers (known technically as the producers’ surplus). Observations of market demand (the marginal values of consumers) and price paid allow the estimation of the net benefit received by consumers when they purchase the biodiversity derived good or service involved. This is the so-called ‘consumers’ surplus’.

Hence, for marketed biodiversity goods – such as the rights to prospect for biodiversity and biodiversity-based, commercial ecotourism experiences – if there are sufficient observations of trades, it is possible to use standard economic techniques to estimate values for both buyers and sellers.

Revealed preference techniques

In other circumstances, market data are available for goods and services that are in some specific way related to the biodiversity value in question. These data can be used to infer values for the biodiversity goods and services.

The first group of such ‘revealed preference’ techniques involve observing the behaviour – specifically, the purchases – of people when biodiversity benefits are threatened. Values are thus inferred from the amount of money people are willing to spend to avoid or mitigate the consequences of biodiversity loss. These techniques are variously known as the preventative or mitigatory expenditure and averting behaviour approaches. Hence if a species is under threat of extinction, the cost of a captive breeding programme may be used to estimate the benefit being provided by its continued survival.

The second approach involves the estimation of how much it would cost to replace the lost biodiversity benefit with a substitute. This replacement cost technique is exemplified by the use of the costs of water filtration units to substitute for the water purification services offered by a biodiverse wetland.

Both of these types of approach do not strictly estimate the value of biodiversity benefits. They are surrogate approaches in that they estimate costs associated with providing substitutes or avoiding loss. Their accuracy in producing measures of value rely on a number of factors. First, if the substitute under the replacement cost approach is not perfect or the mitigation/ prevention/aversion strategy is not complete, then both approaches will be inadequate. The costs estimated do not relate exactly to the biodiversity benefit being considered. Secondly, both types of approach rely on the decision to undertake the prevention or the replacement of biodiversity being made with due consideration to the benefits being generated as a consequence. To illustrate this point, consider the decision of an individual to replace a damaged engine in their car. If the value of services offered by the continued operation of the car are assessed to be greater than the cost of a new engine, then the replacement will be made and we can be safe in saying that the value of the car’s services are at least as great as the cost of the new engine. So too would the value of restoring an ecological system be greater than the cost of the restoration. Two points are worth noting. First, the restored ecological system must be a perfect substitute for the original and this is not always the case. Second, if the decision is not made with any consideration of the benefits provided, the costs can exceed the benefits. For instance, a government decision to restore an ecosystem for purely political purposes may be taken despite the costs exceeding the biodiversity benefits.

Put simply, neither of these first two approaches can be regarded as conceptually appropriate to the value estimation task but may be useful in providing a first approximation of value.

Other revealed preference techniques are more appropriate. These are techniques that rely on the observation of peoples’ actions in markets that are specifically related to the values impacted by biodiversity change.

The first of these is the production function technique. Under this approach, a biological resource that is impacted by a change in biodiversity must be an input into the production of a marketed good. For instance, the soil biota – a part of the biological resource that can be impacted by a change in biodiversity – is an input into the production of crops. The biophysical relationship between inputs and outputs in the production process (known as the production function) can be used to infer values for the inputs even when they are not marketed. The demand for inputs – which is called a derived demand – can be estimated from the demand for the final marketed output in association with information from the production function. To apply this approach, good biophysical information on the production function is required before the economic relationships between inputs and outputs can be estimated.

The second approach is called the hedonic pricing technique. Here it is the relationship between the price of a marketed good or service and a biodiversity related factor that is used to derive estimates of the value of a change in biodiversity. For instance, again using the soil biota example, the price of land for farming activities may be affected by the quality of the soil biota or the existence of biodiverse shelterbelts. If there are enough data on property sales, it is possible to estimate the relationship between the extent of soil biota and shelterbelts and the price of property and from this values for soil biota and shelterbelts can be derived.

Finally in this genre is the travel cost method. Under this technique a demand curve for a non-marketed recreational/tourist asset that is dependent on the condition of its biodiversity can be inferred from an estimated relationship between visitation rates and the costs of travelling to the site. In other words, by investigating how much people are willing to pay to get to a site, it is possible to infer the value they enjoy from being at the site.

Stated preference techniques

Limitations in the range of biodiversity value types that can be estimated using either the market based or revealed preference techniques, led to the development of stated preference techniques. In this type of technique a sample of people are asked about their preferences for a biodiversity sensitive asset under a hypothetical set of circumstances. A number of different methods have been developed to inquire about peoples’ preferences.

The first stated preference technique to be developed was the Contingent Valuation Method. Originally, this method required that a sample of people be asked the amount they would be willing to pay to secure an improvement in a particular aspect of biodiversity. More recently, the technique has been refined so that most applications use a dichotomous choice version that involves people being asked if they would or would not support a proposal to improve biodiversity given some personal monetary cost.

The most recently developed stated preference technique is Choice Modelling or Choice Experiments. Under this method a sample of people is asked to choose their most preferred alternatives from a sequence of grouped options that relate to different biodiversity management strategies. Each option is described in terms of its biodiversity outcomes and a personal monetary cost to be born personally by the respondent. By analysing the choices made by respondents it is possible to infer the trade offs that people are willing to make between money and greater biodiversity benefits. This in turn allows the estimation of values for biodiversity changes.