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Department of Economics and Resource Management 1 Department of Economics and Resource Management 1

Econ 4910 Environmental Economics ENVIRONMENTAL VALUATION Techniques and applications Ståle Navrud Department of Economics Econ 4910 Environmental Economics ENVIRONMENTAL VALUATION Techniques and applications Ståle Navrud Department of Economics and Resource Management Norwegian University of Life Sciences 2111 2005

Department of Economics and Resource Management NORWEGIAN UNIVERSITY OF LIFE SCIENCES Contents = Why Department of Economics and Resource Management NORWEGIAN UNIVERSITY OF LIFE SCIENCES 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 3 = The ultimate validity test. - Will people actually pay? www. umb. no

Department of Economics and Resource Management NORWEGIAN UNIVERSITY OF LIFE SCIENCES 4 www. umb. Department of Economics and Resource Management NORWEGIAN UNIVERSITY OF LIFE SCIENCES 4 www. umb. no

Department of Economics and Resource Management NORWEGIAN UNIVERSITY OF LIFE SCIENCES Department of Economics Department of Economics and Resource Management NORWEGIAN UNIVERSITY OF LIFE SCIENCES Department of Economics and Resource 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 5 www. umb. no

Department of Economics and Resource Management Why value environmental goods? = Cost-benefit analysis (CBA) Department of Economics and Resource Management 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) 6

Department of Economics and Resource Management How to value environmental goods? = Welfare theory: Department of Economics and Resource Management How to value environmental goods? = Welfare theory: Compensating Variation (CV) for a change in environmental quality Q 0 Q 1 V (Q 0, Y) = V (Q 1, Y - CV) = U 0 - 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 7 = Damage Function Approach = Environmental Valuation Techniques Stated Preferences (SP) and Revealed Preferences (RP) -

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

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Department of Economics and Resource Management Classification of Environmental Valuation Techniques ______________________________________ I) Methods Department of Economics and Resource Management Classification of Environmental Valuation Techniques ______________________________________ I) Methods based on individual preferences Indirect Revealed Preferences (RP) Hedonic Price (HP) method Stated Preferences (SP) 10 Household Production Function (HPF) Approach: - Travel Cost (TC) - Averting Costs (AC) Direct Simulated markets Market prices Replacement Costs (RC) Contingent Ranking (CR) Choice Modelling (CM) Contingent Valuation (CV)

Department of Economics and Resource Management Classification of Environmental Valuation Techniques ______________________________________ II) Methods Department of Economics and Resource Management Classification of Environmental Valuation Techniques ______________________________________ II) Methods based on decision makers’/experts’/interest groups’ preferences Indirect Revealed Preference s (RP) 11 Implicit valuation (IV) Stated Preference s (SP) Multi Criteria Analysis (MCA) Direct Delphi Method

Department of Economics and Resource Management Contingent Valuation (CV) method = Describe environmental impact Department of Economics and Resource Management 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 12 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

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Department of Economics and Resource Management Review of selected Contingent Valuation (CV) studies estimating Department of Economics and Resource Management 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. Ship/Year Location of spill / Amount of Damages Natural or Household oil spilled Resource surveyed (tons) Mean WTP(euro) per household, one-time amount Oil Spill Prevention Plan Reference injury; according to CV survey Exxon Valdez Prince William 1989 31 1. 600 km Carson et. Sound, Alaska, (Median WTP; of sea shore al. (1992) USA / used as a robust lower bound of affected, results from discrete choice WTP questions) 50. 000 sea All US Households 38. 800 Killed 75. 000 birds, 580 sea otters, and 100 seals, no fish killed Note: The amounts are not annual values but one-time amounts, and should be interpreted as 15 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.

Department of Economics and Resource Management Ship/Year Location of spill / Amount of Damages Department of Economics and Resource Management Ship/Year Location of spill / Amount of Damages Natural or Household oil spilled Resource surveyed (tons) Mean WTP (euro) per household, one-time amount Oil Spill Prevention Plan Reference injury; according to CV survey Nestucca Gray´s Harbour, 1. 000 1 large spill Kills Rowe et. 1988 Washing-ton, termed in 70 years 300, 000 sea al. (1991) USA / “medium 135 - 160 birds and Households in the spill”; State of WTP for oil 1 medium fish/shores Washington spills of spill every Kills US) and other sizes 5. year: 40. 000 sea the State of also elicited 80 -95 birds, and (equals size of the Nestucca oil spill) some effects on Several small Kills spills every 1, 000 sea 5. year: birds, small 50 impacts Routine very Few small spills : impacts on 25 – 30 fish and shores British Colombia (Canada) 16 effects on fish/shores

Department of Economics and Resource Management Ship/Year Location of spill / Amount of Damages Department of Economics and Resource Management Ship/Year Location of spill / Amount of Damages Natural or Household oil spilled Resource surveyed (tons) Mean WTP(euro) per household, one-time amount Oil Spill Prevention Plan Blücher 19942 Reference injury; according to CV survey Outer Oslo Fjord, Norway /Households in the nearby local community of Frogn 1. 500 400 -660 Oil spills Bergland (1994) in beach area heavily used for recreation 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 17 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.

Department of Economics and Resource Management CV survey of avoiding Oil Spills from tankers Department of Economics and Resource Management 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 18

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

Department of Economics and Resource Management Service-to-Service approach - HEA Appropriate quantity of replacement Department of Economics and Resource Management 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 20 Habitat Equivalency Analysis (HEA)

Department of Economics and Resource Management = Assumption: Acceptance of a one-to-one trade-off between Department of Economics and Resource Management = 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. 21 – Economic Value = units x replacement costs/unit for each service; aggregated over all services

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Department of Economics and Resource Management Comparing Common Practice at DG Environment and US Department of Economics and Resource Management Comparing Common Practice at DG Environment and US EPA Issue DG Environment US EPA Conceptual Approach VOSL, adjusted Base Estimate Best Estimate from UK CVM transport studies Central value: € 1. 4 million[1] Collection of studies, mostly hedonic wage Central value: $6. 1 million Sensitivity around Base Estimate Upper limit: € 3. 5 m from Extern. E Weibull distribution fitted to collection of study means Lower estimate: € 0. 65 m (requiring fewer adjustments) Age 0. 7 adjustment for age 70+ No adjustment Alternative calculations with VLY and age-specific VOSL Cross-Sectional Income Differences No adjustment, EU 15 No adjustment PPP adjustment between EU 15 and Accession Countries Growth in Real Income over Time See Below Adjust for changes in per capita GDP Central income elasticity of WTP of 0. 4 Latency Discount over latency period at 4 percent real discount rate Sensitivity rate of 2 percent to reflect likely rise in real income over time Has varied: Cancer Premium +50% adjustment No adjustment Health Status No adjustment 27 [1] € 0. 85=1 US$ No discounting Discount over latency period at 2 to 3 percent real discount rate

Department of Economics and Resource Management Value Transfer / Benefit Transfer Often lack of Department of Economics and Resource Management 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 28 Validity = 5 country CV study of Respiratory Illnesses (caused by air pollution) transfer error = 40 %

Department of Economics and Resource Management NORWEGIAN UNIVERSITY OF LIFE SCIENCES VALIDITY 1) Content Department of Economics and Resource Management NORWEGIAN UNIVERSITY OF LIFE SCIENCES VALIDITY 1) Content Validity (e. g assessment of CV questionnaire) 2) Construct validity - Theoretical (e. g. WTP = f (Q, Y, S, O) ) - Convergent (e. g. comparison of SP and RP) 3) Criterion (Predictive) validity - hypothetical versus actual willingness-to-pay (WTP) Case: Preserving biodiversity in coniferous forests in the Oslomarka Forest. 29 www. umb. no

Department of Economics and Resource Management NORWEGIAN UNIVERSITY OF LIFE SCIENCES CHALLENGES = Increase Department of Economics and Resource Management NORWEGIAN UNIVERSITY OF LIFE SCIENCES 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 30 www. umb. no

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