teeb training session 2: valuation methods 1 ©teeb
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The Economics of Ecosystems & BiodiversityThe Economics of Ecosystems & Biodiversity
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Session 2:Valuation methods 1
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The Economics of Ecosystems & BiodiversityThe Economics of Ecosystems & Biodiversity
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Approaches to Valuing Ecosystem Services
Direct market valuation approaches: use data from actual markets
Revealed preference approaches: economic agents “reveal” their preferences through their choices
Stated preferences approaches: simulated markets where values are sought for changes in provision or policy
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Direct market valuation: Market-based
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
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Direct market valuation: Cost-based
Cost based approaches– Costs incurred in recreating an ecosystem service
artificially Avoided cost method Replacement cost method Mitigation or restoration cost
Appropriate for regulating services
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Direct market valuation: Production function
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
Applicable to regulating and supporting services
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Direct market valuation: limitations
Lack of markets for ecosystem servicesMarkets are distortedReplacement cost approach can overstate valuesProduction function approaches have specific problems:
– Lack of data/knowledge of cause-effect relationships
– Interactions across ecosystem services increases likelihood of double counting
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Revealed preference
RP methods are based on observations of individual choices related to an ecosystem service
Appropriate for direct and indirect use goodsStages
1. Determine existence of surrogate market for ecosystem service
2. Select appropriate RP method
3. Collect market data to estimate demand function
4. Infer value of change in quantity/quality from demand function
5. Aggregate values
6. Discount values where appropriate
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Revealed preference: Travel Cost Method
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
Appropriate for cultural services
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Revealed preference: Travel Cost Method cont…
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
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Travel cost method: example
Nam and Son (1991)– Recreational value of the
Hon Mun Islands Vietnam
– Marine Protected Area established in 2001 with US$2m funding over 4 years
– Proposal to expand port at Nha Trang City with impacts on water quality and marine ecosystems
Source: Google Maps
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Travel cost method: example
Both domestic and foreign visitors to Hon Mun were surveyed and zonal TCMs estimated– 10 domestic zones, 3 international zones– In 2000 there were 397,000 domestic and 118,700
foreign visitors
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Travel cost method: example
TCM value estimates (1US$ = 14,500VND)
Consumers surplus Price paid Recreational value All
Visitors (US$m)
Per Visitor(US$)
All Visitors (US$m)
Per Visitor(US$)
All Visitors (US$m)
Per Visitor(US$)
Domestic visitors
1.49 8.96 2.46 15.16 3.95 22.74
Foreign visitors
1.64 17.22 31 129.53 13.95 146.76
Total 3.13 14.77 17.90
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Revealed preference: Hedonic pricing
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…
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Revealed preference: Hedonic pricing
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
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Hedonic Pricing: example
UK Defra study on effects of proximity to landfill sites on house prices http://archive.defra.gov.uk/environment/waste/strategy/legislation/landfill/documents/landfill_disamenity.pdf
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Hedonic Pricing: example
Types of disamenity from landfill:– noise, dust, litter, odour, vermin, visual intrusion, perception of
risk 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)
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Hedonic Pricing: example
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
Models estimated separately for counties (sub-regions) to account for differing property markets
Hedonic model captured 80% of the variation in house prices, variables had “right” signs
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Hedonic Pricing: example
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Hedonic Pricing: example
Average reduction in house prices of £5,500 within 0.25 miles of landfill and £1,600 between 0.25 and 0.5 miles
Average total UK disamenity = £2,483mBetween £334,350 and £478,990 per landfill siteBetween £1.52 and £2.18 per tonne of waste
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Hedonic Pricing: example
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
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Revealed preference: limitations
Market imperfections and policy failuresLarge, good quality data sets requiredExpensive and time consumingOmits non-use valuesSensitive to assumptions made on relationship between
ecosystem service and surrogate market
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Stated preference
SP approaches use simulated markets to elicit willingness to pay (WTP) or accept (WTA) values for changes in ecosystem service provision
Appropriate for both use and non-use values– May be difficult to segregate these value motives from
WTP Survey based methods in which respondents are
presented with a hypothetical market describing the change in service provision
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Stated preference Summary on methods covered
Contingent valuation method One policy-on scenario compared with Business As Usual
(BAU)
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) Group valuation
Less commonly applied – links valuation with deliberative methods
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Stated preference: Contingent valuation
Contingent valuation method (CVM)A hypothetical market is described in which respondents
either buy (WTP) or sell (WTA) a specified level of an environmental good or service
The values which are elicited are “contingent” on the hypothetical market with which respondents are presented
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Stated preference: Contingent valuation cont…
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
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Stated preference: CVM process I
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. open-ended elicitation method).
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Stated preference: CVM process II
Survey implementation and sampling– Interview implementation: face-to-face, mail, telephone,
internet, groups
– Interviewers: private companies, researchers
– Sampling: convenience sample, representative and stratified sample
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Stated preference: CVM process III
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
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Stated preference: CVM process IV
Technical validation– Estimating a bid function
– Testing the validity and reliability of the estimates produced
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Stated preference: CVM process V
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.
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Stated preference: CVM example
1989 Exxon Valdez spilt 11 million gallons of oil in Prince William Sound, Alaska.
CVM study was carried out to estimate passive use value (existence, bequest) loss to US citizens.
WTP values sought for policies to prevent similar spills in future.
WTA would have been correct measure.Estimated total loss was $2.81bn
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Contingent valuation method: example
• Bann (1999)– Survey of 300
households’ WTP for mangrove protection in Benut, Malaysia (243 useable responses)
Source: Google Maps
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Contingent valuation method: example
56% of respondents stated a positive WTP, of those who didn’t 49% gave protest responses, meaning that
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
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Stated preference: Choice modelling
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
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Stated preference: Choice modelling
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
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Choice Modelling: exampleValuing quality changes in Caribbean coastal waters for
heterogeneous beach visitors (Beharry-Borg and Scarpa, 2010)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.
Most valuation studies in the Caribbean have focussed on obtaining WTP values for attributes associated with snorkelling and scuba diving
There were 9 attributes in the snorkeler subsample and 6 in the non snorkeler subsample plus a cost attribute
Cost was described in terms of a contribution cost to an NGO
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Choice Modelling: example
1. Number of boats near the coastline
2. Presence of a marine protected area
3. Level of coastline development
4. Average bathing water quality
5. Level of vertical visibility
6. Number of plastics per 30m
7. Contribution fee
8. Number of snorkelers per group
9. Level of coral cover
10. Number of fish seen while snorkelling
Attributes
Snorkelers
Non-snorkelers
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Choice Modelling: example
No Policy High Policy Low Policy
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• 198 (snorkellers) and 86 (non-snorkellers) = 284 respondents
Choice Modelling: example
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Choice Modelling: example
Individual-specific WTP estimates (TT$ ~ 0.16US$) for snorkelers
Class one (61%) Class two (39%)
Up to 60 fishes 35 5
Up to 45 % coral cover 50 10
Vertical visibility of up to 10 m 40 10
Marine Protected Area which allows fishing 33 7
Marine Protected Area which prohibits fishing 34 10
Plastics of up to 5 pieces 15 50
Low chance of ear infection 22 25
Low level of development 15 40
1TT$ ~ 0.16US$
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Stated preference: Group valuation
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
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Stated Preference: Limitations
Sometimes the only way to capture non-use values Hypothetical nature of the markets: do the decisions correctly
reflect real-life behaviour? Divergence between WTP and WTA estimates (theoretically
equal) Insensitivity to scope and scale Are the different values comparable to a common metric? Goods are complex – is there a need for pre-valuation
workshops so that respondents can better understand their preferences?
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Comparisons between approaches: Market-based
Advantages Disadvantages
Market prices •Reflect private WTP•Construct financial accounts•Easy to obtain
•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
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Comparisons between approach - cost-based
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
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Comparisons between approach - Revealed and stated preference
Advantages Disadvantages
Hedonic pricing •Reflects private WTP•Based on observed behaviour
•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 of TEV
•Sensitive to biases in survey 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
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What do the methods capture?TEV and valuation methods
Use values Non-use values
Direct Indirect BequestExistenceOption
Market
Production Function
Revealed Preference
Stated Preference
Confidence?
Confidence?
Value?
Value?
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Session Summary
Different methods available but variability in terms of:– Data needs
– Categories of TEV valued
– Confidence in value outcomes
Those that rely on market prices (or surrogates/ proxies) tend to only value a sub-set of ecosystem services
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Group exercise
Returning to the gaps on value information you identified earlier, can you suggest which valuation methods might be appropriate to address the gaps?
Do any gaps remain?
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