Valuing the Environment: Methods

1. Valuing the Environment: Methods • Ch. 4

3. Soon after the Exxon Valdez oil tanker ran aground on the Bligh Reef -off the coast of Alaska 1989- spilling approximately 11m gallons of crude oil, the Exxon Corporation (now Exxon Mobil) accepted the liability for the damage caused by the leaking oil.

4. This liability consisted of two parts: • the cost of cleaning up the spilled oil and restoring the site • compensation for the damage caused to the local ecology. Approximately $2.1b was spent in cleanup efforts and Exxon also spent approximately $303m to compensate fishermen whose livelihoods were greatly damaged for the five years following the spill... and more $$

5. In the spring of 2010, a BP well in the Gulf of Mexico, exploded and began spewing an Exxon Valdez–size oil spill every 4–5 days. More than 200 million gallons had been spread through the Gulf of Mexico, almost 20 times greater than the Exxon Valdez spill.

6. Interestingly, the Exxon Valdez spill triggered focused on providing monetary estimates of environmental damages, setting the stage for what is today considered standard practice for non-market valuation. • While the costs of cleanup are fairly transparent, estimating the damage is more complex. For example, how was the number $900 million in damages in the Exxon case arrived at?

7. Why Value the Environment? • While it is difficult, if not impossible, to place an accurate value on certain environmental damages, not doing so leaves us valuing them at $0. • Will valuing them at $0 lead us to the best policy decisions? • Read: Debate 4.4 - p.76

8. Valuing Environmental Services: Pollination as anExample • Pollination is one example of a valuable ecosystem service with multiple benefits, including non-market impacts, • A direct economic impacts of increasing the productivity of agricultural crops. • Many agricultural crops rely on bee pollination.

9. Beekeeper surveys suggest that 33% of honeybee colonies in the United States died in the winter of 2010. • What would be the global cost of losing or reducing this valuable ecosystem service? • One study argues that possible future shortages are likely to have quite different economic impacts around the globe • Read example 4.1 - p77

10. Valuation • damage caused by pollution and, • the services provided by the environment,

11. some of the difficulties associated with one of those contexts, pollution control. • In the US, damage estimates are used in: • the design of policies, • also become important in the courts. • Some basis for deciding the magnitude of liability awards is necessary.

12. The damage caused by pollution can take many different forms. • The first, and probably most obvious, is the effect on human health: Polluted air and water can cause disease when ingested. • Other forms of damage include loss of enjoyment from outdoor activities and damage to vegetation, animals, and materials.

13. Assessing the magnitude of this damage requires: • identifying the affected categories; • estimating the physical relationship between the pollutant emissions (including natural sources) and the damage caused to the affected categories; • estimating responses by the affected parties toward limiting some portion of the damage; • placing a monetary value on the physical damages. (All often difficult to accomplish).

14. After identifying whether a particular effect results from pollution, The next step is to estimate how strong the relationship is between the effect and the pollution concentrations. • estimate how much reduction in illness could be expected from a given reduction in pollution. • Once physical damages have been identified, place a monetary value on them.

15. Types of Values • Economists have decomposed the total economic value conferred by resources into three main components: • use value, • option value, and • nonuse value

16. Use value reflects the direct use of the environmental resource: ex. fish harvested from the sea, timber harvested from the forest, water extracted... • Some of these uses are called passive-use values or non-consumptive use values if the resource is not actually used up (consumed) in the process of experiencing it. • Pollution can cause a loss of use value, such air pollution, an oil spill adversely affects a fishery,,,

17. option value: reflects the value people place on a future ability to use the environment. • Option value reflects the willingness to pay to preserve the option to use the environment in the future even if one is not currently using it.

18. Whereas use value reflects the value derived from current use, option value reflects the desire to preserve the potential for possible future use. • Are you planning to go to Yellowstone National Park next summer? Perhaps not, but would you like to preserve the option to go someday?

19. nonuse value: reflects the common observation that people are more than willing to pay for improving or preserving resources that they will never use (for your children and grandchildren) • TWP = Use V + Option V + Nonuse V • Since nonuse values are derived from motivations other than personal use, they are obviously less tangible than use values. Total willingness to pay estimated without nonuse values • Read Example 4.2 - p.81

20. Classifying Valuation Methods • Typically, the goal is to estimate the TWP for the good or service in question. • This is the area under the demand curve up to the quantity consumed (Ch2). • For a market good, this calculation is relatively straightforward. However, non-market goods and services, require the estimation of WTP through examining behavior, drawing inferences from the demand for related goods, or through responses to surveys. capturing all components of value is challenging.

21. methods available to estimate • ValuationMethods: • stated preference and revealed preference methods • Revealed preference methods are those that are based on actual observable choices that allow resource values to be directly inferred from those choices.

22. Example, in calculating how much local fishermen lost from the oil spill: • the revealed preference method: how much the catch declined, the resulting diminished value of the catch. • In this case, Ps are directly observable, Allows the direct calculation of the loss in value. Or, calculating the value of an occupational environmental risk (such as some exposure to a substance that could pose some health risk). • we might examine the differences in wages across industries in which workers take on different levels of risk.

23. Direct stated preference case: when the value is not directly observable • the nonuse value of the Northern Spotted Owl was not directly observable. Hence, the authors attempted to derive this value by using a survey that attempted to elicit the respondents’ willingness to pay (their “stated preference”) for the preservation of the species. (Ex. 4.1) • Read: Debate 4.1- p.86

24. NEXT: Chapter 5: • Dynamic Efficiency and Sustainable Development