Policy Analysis Economic Valuation of the Environment: A Special Issue† R. SCOTT FARROW, CAROL B. GOLDBURG, AND MITCHELL J. SMALL* Department of Engineering & Public Policy and Center for the Study and Improvement of Regulation, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213
How much would you pay to view the Grand Canyon with less smog? To prevent illness and death from fine particles? To protect outer space from becoming a garbage dump for old, inactive satellites? Such information is useful if your resources are limited and you are trying to put them to best use. It is also useful if you are trying to determine a surcharge for the activities that generate pollution, set the quantity and initial allocation of tradable emission permits, measure economic activity in terms that better reflect quality of life, or win damages in a court case involving natural resources. It is not so useful if you are trying to win friends. Indeed, you may be the target of criticism that economists often hear; that in seeking to determine a price for everything, you learn the value of nothing. Valuation and its application in cost-benefit-based management have a long history. Benjamin Franklin advocated a “moral or prudential algebra”, while Abraham Lincoln supported the collection of statistics on “hindrances, delays, and losses of life and property during transportation” as part of transportation planning (1). To properly appreciate the complexities of valuing environmental services and goods, one must first understand the framework in which economists value standard goods and services. The standard economic framework is grounded in human self-interest and rational choice. Self-interest, defined in its broadest sense to include the full range of human motivations, mandates that actions be based on how much pleasure or pain their consequences bring an individual vis a` vis an alternative action. A few assumptions, a little calculus and algebra, and the desirability of competitive markets follows. What also follows is that competitive market prices represent both the additional cost to society and the subjective incremental value of goods to each individual, so that prices and values are equal at the margin. Environmental valuation becomes most complex precisely when the standard framework fails to yield well-functioning markets and prices, in particular when dealing with problems of the commons (shared or unassigned resources). The shortcomings include uncompensated and indirect impacts (or externalities) on third parties and a limited or very costly ability to process the available information. This failure in turn leads to problems in standard methods of evaluation for environmental goods and services. Methods for evaluation have considered both observed and hypothetical behavior. Observed behavior is most readily interpreted when there are established markets, but in matters environmental there are few [though in recent years, increasing (2)] markets. Valuation in the absence of a clear †
Part of the special issue on Economic Valuation. * Corresponding author phone: (412)268-8782; e-mail: ms35@ andrew.cmu.edu. Present address: Department of Civil & Environmental Engineering, Carnegie Mellon University, Pittsburgh, PA 15213. 10.1021/es000944o CCC: $19.00 Published on Web 03/04/2000
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market setting is the nub of the environmental valuation question and the focus of most research. For some problems, valuation can be inferred by relating environmental quality to analogous market or surrogate actions. Travel cost models examine how much longer people are willing to travel to enjoy a higher quality environmental amenity, such as a day at a cleaner state park by a less polluted lake. Such a model was first proposed by Harold Hotelling to the U.S. Forest Service in the 1940s (3). Surveys can also be used to elicit information related to the public’s values. Contingent valuation [first used in 1963 for evaluating environmental goods (4)] and related methods ask respondents to state their preferences between hypothetical payments and increases or decreases in environmental quality or risk. Recent article collections on environmental valuation take thousands of pages to cover the literary highlights in environmental and resource economics (5). A healthy volume of textbooks and supplementary material synthesizes the existing literature (6, 7). When all is said and done about valuation, what’s the purpose? Policy-makers, advocates, and managers need, in a complex world, to differentiate between better and worse alternatives. It is much easier to distinguish better from worse in one dimension or in as few of them as possible. Valuation methods claim to measure different impacts in monetary terms that can be consistently and logically added and subtracted. The impacts come first, for there is no valuation without a physical state of the world, but economists sit atop a demand for reaching a single bottom line. The importance of economic valuation has prompted accelerated research to advance its theoretical and empirical basis. The U.S. EPA and the National Science Foundation recently sponsored a set of projects on Decision Making and Valuation for Environmental Policy, while organizations such as the European Union and the European Investment Bank have commissioned a variety of appraisal studies. Given this growing interest and demand for research, the Editors and Advisory Board of Environ. Sci. Technol. decided to solicit a special policy analysis issue to highlight the topic. Leading scholars, including environmental economists, scientists, engineers, ethicists, and decision-makers, were contacted and asked to contribute papers. Their enthusiastic and productive response led to the collection that follows. The first two papers by Arrow et al. and Bockstael et al. help frame and define the key issues. In Managing Ecosystem Resources, Arrow et al. identify the critical features of ecosystems that make attempts at valuation so challenging. These include the difficulty of identifying the full set of products and services, both market and public, provided by an ecosystem and the definition of appropriate system boundaries and production functions. Systems can exhibit highly nonlinear, discontinuous, and possibly irreversible responses to anthropogenic inputs. This argues for the selection of adaptive and precautionary approaches to ecosystem management, with “adaptive probing” and careful monitoring. Bockstael et al., in On Measuring Economic Values for Nature, focus on the controversy surrounding recent efforts to value the full set of services provided by the earth’s ecosystems and to use these estimates for local policy and evaluation. They argue that values are relative, dependent upon the context-specific tradeoffs that people are willing to make among viable alternatives. They also identify some of the key issues that bedevil efforts at large-scale valuation, including equity concerns when aggregating economic VOL. 34, NO. 8, 2000 / ENVIRONMENTAL SCIENCE & TECHNOLOGY
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damages or benefits across groups with highly varying income and willingness to pay. Like Arrow et al., they note the critical need for collaboration among environmental scientists and economists to tackle these issues. The next five papers in the collection present and illustrate the major methods used for economic valuation. Richard Carson begins the set with Contingent Valuation: A User’s Guide, laying out the major assumptions and issues researchers and analysts face when implementing a contingent valuation (CV) survey for determining passive use benefits. This paper addresses the major points of controversy in CV and proposes five criteria for evaluating the quality and validity of a CV study. When, as with many environmental problems, there is a risk of human health impact, human mortality and morbidity enter the valuation account. The value of human health and safety may be stated explicitly or, as is more often the case, revealed implicitly in the investments people are willing to make (or payments they are willing to accept) to avoid (or accept) a risk. James Hammitt, in Valuing Mortality Risk: Theory and Practice, reviews the theoretical foundation and empirical methods for estimating the “value of a statistical life” (VSL). Hammitt identifies needs for further research to elucidate how the VSL is affected by the nature of the lifethreatening risk (e.g., its voluntary vs involuntary features, controllability, and latency), the degree of risk-comprehension present in revealed-preference studies, and the determination of measures of quality for a “quality-adjusted lifeyear”. Poulos and Whittington focus on a critical factor in valuation studiessthe discount factor for future risks or benefitssin Time Preferences for Life-Saving Programs: Evidence from Six Less Developed Countries. Their empirical surveys in Africa, Eastern Europe, and Southeast Asia indicate that the standard exponential discount function is inadequate and that citizens in these countries generally place much higher weight on present vs future lives saved than do those in developed countries, with important implications for economic planning and evaluation. Most environmental problems involve multiple aspects of human health, ecosystem impact, and natural resource damage. Farber and Griner, in Using Conjoint Analysis To Value Ecosystem Change, present an approach for establishing preferences and values across multi-attribute alternatives. The conjoint analysis method asks participants to rank and rate alternatives, helping to identify the structure of multiattribute preferences as well as their monetary values. Mourato et al., in Evaluating Health and Environmental Impacts of Pesticide Use: Implication for the Design of Ecolabels and Pesticide Taxes, apply this method to estimate what consumers would be willing to pay for an “environmentally friendly” bread product that avoids both human health and ecological impacts, with ecological risk measured by the number of threatened bird species. They use their analysis to inform the design and pricing of green products and a possible pesticide tax in the U.K. The next three papers address a number of the critical ethical issues underlying the formulation and application of environmental valuation methods. Clive Spash, in Multiple Value Expression in Contingent Valuation: Economics and Ethics, reports on ethical beliefs among many study participants that preclude them from even considering substitution of environmental quality with other commodities or payments. These beliefs are frequently manifested in protests against the elicitation of willingness to pay for an environmental resource, with participants offering a bid of zero, but noting that their bid is based on a position that protection of the resource is a matter of rights, not economics. Spash’s results indicate that environmental values combine ethical and economic aspects in a more complex manner than traditionally assumed in classical economics, with important 1382
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implications for policy- and decision-making. Baruch Fischhoff, in Informed Consent for Eliciting Environmental Values, focuses upon the right of valuation study participants to know how their stated preferences will be used to inform subsequent commitments or decisions. Securing informed consent carries with it an obligation to ensure and to test the effectiveness of communications to the participants on the environmental system and the associated risks and benefits of the alternatives considered. Many of the most fundamental assumptions of economic valuation are challenged by Mark Sagoff, in Environmental Economics and the Conflation of Value and Benefit. Sagoff argues that willingness to pay as measured in economic studies fails to correlate with any independently defined concept of value and cannot serve as a criterion for assessing the values that typically motivate environmental decisions. Sagoff instead maintains that only representative political and deliberative processes can capture the ethical, religious, scientific, and political factors that lead people to support or oppose a particular social or environmental policy. The final two papers attempt to identify the growing suite of issues that, notwithstanding concerns, provide an ongoing and increasing demand for economic valuations. Matthews and Lave, in Applications of Environmental Valuation for Determining Externality Cost, discuss how environmental damage functions are being used in the United States to determine “externality adders” for full-cost pricing of products and processes such as electric power and for benefitcost studies of environmental regulations. They propose an economic input-output life cycle assessment for estimating the environmental damages generated by different sectors of the economy in order to adjust (or “green”) national economic activity accounts to better reflect environmental quality and sustainability. Pearce and Seccombe-Hett explore the growing application of Economic Valuation and Environmental Decision-Making in Europe. They review various valuation techniques and discuss how legal developments in Europe and the U.K. have affected their formal application to policy analysis, to project evaluation, to determination of modified national accounts, and to design of product taxes. Even a quick inspection of the papers in this issue makes it clear that the problems addressed are critically important to emerging environmental policy and decision-making. Furthermore, they demand contributions and collaboration along a wide spectrum of environmental science, engineering, economics, ethics, law, and the related social sciences. We expect this collection to become an important milestone in the field of environmental valuation and believe that Environ. Sci. Technol. readers will greatly benefit from a clearer understanding of this special issue.
Acknowledgments A number of the authors solicited for this collection are investigators for the NSF/EPA program on Decision Making and Valuation for Environmental Policy. We gratefully acknowledge the assistance of Ainsley Caldwell and Stephen Lingle of the EPA ORD National Center for Environmental Research and Quality Assurance in helping us to identify potential contributors. The Environ. Sci. Technol. Editors and Advisory Board also helped to promote and encourage the effort; special thanks to John Ehrenfeld, Sheila Jasanoff, Granger Morgan, and Alexander Zehnder for their guidance and suggestions. We gratefully acknowledge the timely and constructive efforts of the anonymous peer reviewers and Karen Peretin’s efforts in coordinating the reviews. Comments on this paper were provided by Elizabeth Shay and Thomas Lehman.
Literature Cited (1) Benjamin Franklin, London, September 19, 1772, and Abraham Lincoln, Washington, June 20, 1848 as quoted in Gramlich, E.
(2)
(3)
(4) (5)
M. A Guide to Benefit Cost Analysis, 2nd ed.; Prentice-Hall: Englewood Cliffs, NJ, 1990. For example, the increasing use of ecolabels to certify environmentally favorable products, especially in Europe, provides a partial mechanism for overcoming consumers’ lack of information and for observing actual willingness to pay in the marketplace. Hotelling, H. Letter to the National Park Service (dated 1947). In An Economic Study of the Monetary Evaluation of Recreation in the National Parks; U.S. Department of the Interior, National Park Service and Recreational Planning Division: Washington, DC, 1949. Davis, R. Nat. Resour. J. 1963, 3 (2), 239-249. (a) Bromley, D. W. The Handbook of Environmental Economics; Blackwell Publishers: Cambridge, 1995. (b) Oates, W. E. The Economics of the Environment; Edward Elgar: Northampton, 1992. (c) Stavins, R. N.; Dorfman, R. Economics of the Environment, 4th ed.; W. W. Norton: New York, 1999. (d) Van den Bergh, J. C. J. M., Ed. Handbook of Environmental and Resource Economics; Edward Elgar: Northampton, 1999. (e) Willis, K. G., Button, K., Nijkamp, P., Eds. Environmental Valuation; Edward Elgar: Northampston, 1999.
(6) Examples at the undergraduate level are (a) Kahn, J. R. The Economic Approach to Environmental and Natural Resources, 2nd ed.; Dryden Press: New York, 1998. (b) Pearce, D. W. Economic Values and the Natural World; MIT Press: Cambridge, 1993. (c) Portney, P. R.; Stavins, R. N. Public Policies for Environmental Protection, 2nd ed.; Resources for the Future: Washington, DC, 1999. (d) Tietenberg, T. Environmental and Natural Resource Economics, 5th ed.; Addison-Wesley: New York, 1999. (7) Examples at the graduate level are (a) Freeman, A. M., III. The Measurement of Environmental and Natural Resource Value: Theory and Measurement; Resources for the Future: Washington, DC, 1994. (b) Hanley, N.; Shogren, J. F.; White, B. Environmental Economics in Theory and Practice; Oxford University Press: New York, 1997.
Received for review February 3, 2000. Accepted February 14, 2000. ES000944O
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