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Environmental Economics and Valuation

Alberto LongoDepartment of Economics and International Development

University of Bath, England

A.Longo@bath.ac.ukTel. +44 1225 384508

Integrated Assessment of Trade Related Policies and Biological Diversity in the Agricultural Sector

International Environment House, Châteleine, Geneva, 15 July 2005

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Why valuation?

• Once policies, biodiversity indicators, scenarios, targets have been identified, it is useful to compare them with the status quo by quantifying impacts in monetary terms.

• We have the opportunity to advise policy makers!• Enable environmental impacts to be included in Cost-

Benefit-Analysis (CBA) and therefore in Integrated Assessment

• To take account of environmental damages/benefits caused by the consequences of trade related policies

• To consider the monetary benefits of additional policies that protect/enhance the quality of the environment (biodiversity)

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Categories of environmental benefits• Total economic value = Use values + Non use values

• Non use values= Option values + Existence values + Bequest values

• Use Values: benefits that derive from the actual use of the environment (using herbs for medicinal purposes)

• Option values: additional value placed on a natural resource by those people who want to have the option of using the goods and services in the future

• Existence values: People wish to maintain or improve environmental assets out of sympathy for animals and nature or from moral conviction.

• Bequest values: the desire to preserve environmental assets for the enjoyment of other people of both the present generation and the future generations.

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How do we valuate the effects of policies on biodiversity?

• Market based approaches– Production function – Cost of illness – Cost based

• Non-marked valuation techniques– Hedonic pricing method– Travel cost method– Contingent valuation– Choice experiments– Benefits transfer

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Are these techniques new?

• Harold Hotelling (1949) “An Economic Study of the Monetary Valuation of Recreation in the National Parks,” Washington, DC: U.S. Department of the Interior, National Park Service and Recreational Planning Division.

• In a letter to the US Park Service, Hotelling suggests to use Travel Cost Model to assess the benefits obtained by visitors of a national park.

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Willingness to pay to preserve cultural heritage monuments (churches, monasteries, archaeological sites, caravanserai, ancient bridges) and the surrounding environment

– n=1,000– In-person interviews

(household survey) – mean WTP= 4,125 AMD

(=8 US$)

The Contingent Valuation Method: The protection of cultural monuments in Armenia

(Longo and Alberini, Report to the World Bank, 2005)

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Travel Cost Model:

Visitors at cultural monuments in Armenia

– n=500– on-site interviews– only local Armenians – access value ranges from 5,940 AMD (=11.53

US$) to 14,000 ADM (=27.18 US$)

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How to carry out a valuation exercise?

• Once we identified the scenario(s) (one scenario could be the status quo), or the policies and the indicators we want to valuate, we need to:– Identify whose welfare is affected (or whose welfare

we are interested in)– Clearly define the object of the valuation – Choose the most appropriate methodology

(considering budget constraints, country – case specific)

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Studies of conservation of a single species

Source: Nunes and van der Bergh, 2001

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Multiple species valuation studies

Source: Nunes and van der Bergh, 2001

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Natural habitat valuation studies

Source: Nunes and van der Bergh, 2001

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Studies of valuation of ecosystem functions and services

Source: Nunes and van der Bergh, 2001

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Which agricultural policy (crop?) would you choose?

Policy A

(crop A)

Policy B

(crop B)

Status Quo

(crop Z)

Farmers Income +10% -10% Constant

Jobs in the agricultural sector

+10% +5% Constant

Level of biodiversity

Ecosystem endangered

(60% of habitat preserved)

Ecosystem vulnerable (80%

of habitat preserved)

Ecosystem intact

(100% of habitat preserved)

Which policy would you choose?

□ □ □

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Conclusions

• Effects on biodiversity caused by trade related policies are important, especially in less developed countries

• Need to value changes in the level of biodiversity in order to better inform policy makers

• Valuation exercises should be carried out ex-ante (ex-post valuation studies are also useful, but once we loose an ecosystem it could be impossible to go back to the status quo)

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Choice experiments to assess the WTP forcleaning up contaminated sites

(Regional Science and Urban Economics, 2005)

– In-person interviews – n=293 – conditional logit model – value of cleanup = 2,5 M€

(considering value of the project = 7 M€)

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Contingent valuation on soil erosion (Journal of Environmental Planning and Management, 2005)

– WTP for the protection of the Island of St. Erasmo in the Venice lagoon, Italy.

– Telephone survey – n=1,330 – ‘double-bounded’ model – mean WTP= €66.61 – median WTP= €20.39

(weibull distribution)

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Example of choice question (RSUE, 2005)Attributes SITE A Site B

Site contamination Present Present

Transportation network available within 20 km

Highway and railroad Highway and railroad

Certificate of no further action No Yes

Oversight by government agency

Response to developer’s application within 6 months

Response to developer’s application within 6 months

Cleanup standards Flexible Flexible

City within 20 km Present Present

Government financial incentives as % of the value of the project

20% 10%

If you were to choose between A, B, and the option of not participating in either of the two projects, which would you choose?

A B Neither