Econ 4910 Environmental Economics ENVIRONMENTAL VALUATION Techniques and applications

2. Econ 4910 Environmental EconomicsENVIRONMENTAL VALUATION Techniques and applications Ståle Navrud Department of Economics and Resource Management Norwegian University of Life Sciences

3. Contents • Why Value the environment ? • How to value the environment ? - Welfare economics - Willingnessto-pay (WTP) - Total Economic Value = Use value + Non Use Value • Environmental Valuation Methods - Revealed and Stated Preferences - Damage Function Appraoch • Applications - Water Quality, Oil Spills, Externalities of Electricity Production Health impacts (Value of a Statistical Life), Forest Biodiversity • The ultimate validity test. - Will people actually pay? Department of Economics and Resource Management

4. Department of Economics and Resource Management

5. Department of Economics andResource Management • 33 scientific staff + 6 administrative staff • About 450 M.Sc and B.Sc students • Educational Programs: B.Sc and M.Sc. in Business Administration B.Sc and M.Sc. in Economics and Resource Management M.Sc. in Entrepreneurship and Innovation M.Sc. In Development and Resource Economics (11 scholarships per year) • EU Master in Agricultural Economics and Agribusiness (co-operation between 6 European universities), where our department specializes in in Environmental and Resource Economics • 24 Ph.D. students Department of Economics and Resource Management

6. Why value environmental goods? • Cost-benefit analysis (CBA) of projects/programs • Environmental costing (environmental taxes etc.) • Environmental accounting (at firm level and ”green national accounts) • Natural Resource Damage Asssessmennt (NRDA)

7. How to value environmental goods? • Welfare theory: Compensating Variation (CV) for a change in environmental quality Q0  Q1 V (Q0,Y) = V (Q1,Y - CV) = U0 - WTP vs. WTA; CV vs. Equivalent Variation (EV) • Total Economic Value (TEV) 1) Direct Use Value - Consumptive and non-consumptive use values - Option value 2) Passive Use Value (Non-use Value) - Existence and Bequest values • Quasi – option value (Correction factor to TEV, when irreversible loss (of e.g. Species): = Value of increased information if irreversible action not implemented • Damage Function Approach • Environmental Valuation Techniques - Stated Preferences (SP) and Revealed Preferences (RP)

8. Energy Technology(Extraction/Transportation) Explanation LCA Input/Output Emission/burden Dispersion model Methods Changed concentrations EIA Dose-response functions Impacts (Recreation, Commercial, Ecological) Database of studies and Benefit Transfer techniques, or New valuation study Economic Valuation Methods Damage costs (and identify externalities)

10. Classification of Environmental Valuation Techniques ___________________________________________________________________________ I) Methods based on individual preferences

11. Classification of Environmental Valuation Techniques ___________________________________________________________________________ II) Methods based on decision makers’/experts’/interest groups’ preferences

12. Contingent Valuation (CV) method • Describe environmental impact (EI) /environmental improvement with and without the Program - scientifically correct description of EI, but also understandable to the public; approved by all parties • Describe the program that will avoid the EI • Realistic and fair way of paying for the program, and fair distribution of costs • Willingness-to-pay (WTP) question: The program will reduce eutrophication and improve water quality. What is the most your household is willing to pay in increased water and sewage tax per year? Open-ended (with payment card) or The program will reduce eutrophication and improve water quality at a cost of X US$ per year in increased water and sewage tax. Will your household support the program or not ? Referendum-format/ Dichotomous choice

15. Review of selected Contingent Valuation (CV) studies estimating the willingness-to-pay (WTP) per household (one time amounts) to avoid natural resource injuries from oil spills in the US and Europe. Note: The amounts are not annual values but one-time amounts, and should be interpreted as Present Values (PV). The amounts are converted from US $ and NOK to Euro using conversion rates of 1 US $ = 1.0 euro and 1 NOK = 0.13 euro. Values are presented in the year of the study price level. No correction for inflation or difference in purchase power (e.g. OECDs Purchase Power Parity adjusted exchange rates) have been made.

17. Note:While the Exxon Valdez and Nestucca CV studies were conducted after the acute oil spill, the Blücher study is based on a hypothetical scenario where all the remaining oil in the warship Blücher, which sunk in 1940, were spilled during the process of emptying the ship for oil in the autumn of 1994. The CV study was carried out during this operation to make the scenario as realistic as possible (since there was a probability, although small, that all the oil would be spilled). Also, only the community most affected by a potential spill were interviewed in the Blücher study, while the national and regional population was surveyed in the Exxon Valdez and Nerstucca surveys, respectively.

18. CV survey of avoiding Oil Spills from tankers in Norway • Klethagen (2005) – M.Sc. Thesis • 201 households in the Oslo area • Mean WTP per household as a one-time amount the impacts of a oil spill of: - 40.000 tonn: 92 euro (1000 km beach oiled) - 80.000 tonn: 126 euro (2000 km beach oiled) - Can be compared to the CV-study of the Belgian oil spill prevention plan = 143 2001-euro to avoid 53.000 tonn oil spill

19. Area C (= Area A) Compensatory restoration Habitat Equivalency Analysis (HEA)Compensatory restoration = Interim Loss Natural Resource services Services with primary restoration Services with natural recovery Interim losses Source:Modified fom NOAA (1997)

20. Service-to-Service approach - HEA Appropriate quantity of replacement natural resources and services they provide Determined by obtaining equivalency between: quantity of discounted services lost due to Injury (= Interim loss) quantity of discounted replacement services provided by the compensatory action  Habitat Equivalency Analysis (HEA)

21. Assumption: Acceptance of a one-to-one trade-off between - unit of services lost due to injury, and - unit of services gained due to restoration • Use of ”resource proxies” to quantify ecosystem services • linked to e.g. indicators of primary production (area and density of wetland components: live coral cover, mangrove tree density, marsh-reed stem density) • Unit: Service-ha-years for oiled beaches, and biomass (tons) for marine impacts etc. • Economic Value = units x replacement costs/unit for each service; aggregated over all services

27. Comparing Common Practice at DG Environment and US EPA [1] €0.85=1US$

28. Value Transfer / Benefit Transfer Often lack of time and resources  transfer economic values instead of new valuation study  added uncertainty Methods • Unit transfer (WTP/household as one-time amount) - without corrections - with corrections (e.g. Income, Purchase Power Parity) • Function transfer (WTP = f(Sosioeconomics, env. Quality) from similar type site - value function - meta analysis of previous studies Validity • 5 country CV study of Respiratory Illnesses (caused by air pollution)  transfer error = 40 %

29. VALIDITY • Content Validity (e.g assessment of CV questionnaire) • Construct validity - Theoretical (e.g. WTP = f (Q, Y, S, O) ) - Convergent (e.g. comparison ofSP and RP) 3) Criterion (Predictive) validity - hypothetical versus actual willingness-to-pay (WTP) Case: Preserving biodiversity in coniferous forests in the Oslomarka Forest. Department of Economics and Resource Management

30. CHALLENGES • Increase the number of valuation studies outside USA and Europe to reduce the uncertainty in value transfers for all policy uses • Defining the ”affected population” (N) Total WTP = N x WTPi Global / national / regional / local good • Complex environmental goods - ecosystems • Validity of non-use values • Applying environmental valuation techniques to value health impacts, cultural heritage and other public goods Department of Economics and Resource Management