(Adopted from Rogers, 1995)

Intro to the $ Valuation of Natural Capital

AFS FOR 460/560 Some slides borrowed from Ralf Eriksson, Åbo Akademi University, Sweden

Graphic: Economist.com

Key Concepts• Dimensions of value:

– Types

– Total Economic Value (TEV)

• Valuation Methods

• Benefit/Cost analysis

• Discounting

• Examples:

– Exxon Valdez

Value: the quality (positive or negative) that renders something desirable or valuable;

Category Tree• attribute

• quality

• worth

• $ value

– market value; market price

– book value

– gross domestic product- GDP; gross national product; GNP; national income

– monetary value; price; cost

• unimportance; importance

• par value; face value; nominal value

• price; cost; toll

• Invaluableness; preciousness; pricelessness; valuableness; worthless

Economic Meanings of the word “Value”

• Market & Non-market value

– Use-value – consumptive/non

– Non-use value

• Existence value

• Bequest value

• Present value

• Option value

• Quasi-option value

• Intrinsic

Bali

N. American Grizzly

Olympic National Park

Total Economic Value (TEV)

Source: Bateman (1999)

=X 16 to 54 (1012)/yr

(Costanza et al., 1997. Nature, Vol. 387)

the entire biosphere

USE Values NON-USE Values

Cultural

Religious

Empirical Methods:

1. Conventional market approaches

2. Implicit market approaches

3. Constructed market approaches

Economic Methods for Valuing TEV

1) Conventional market approaches

• Private = Products; CRP; hunting…

– $ from marketing, Gov. check, saved money from hunting on own land… minus all costs

• Public = reduced sedimentation

– Reduced cost of siltation clean up = e.g. field erosion levels are 5 tons per acre – the buffers prevent at least 3T/ac from entering stream – siltation costs are $150/ton – for 100 acres = about $45,000

Conventional market approaches: Opportunity cost approach

• the value of using a resource is measured by examining the values of alternative uses

• e.g. the value of a forest as a natural park rather than harvesting the timber is measured by using the foregone income from selling timber

Conventional market approaches Defensive & preventive expenditures

• In Midwest US value of reduced water quality could be estimated by how much Nitrate Treatment facilities cost:

$ multi-million in Des Moines, IA alone….≈ $2 - 5 Million/yr operating costs

@ $25.00 * 200,000 = $ 5,000,000

Maybe both?

2) Implicit market techniques• Hedonic pricing method

– House price = f (rooms, access, … environment)

• Travel cost method– the value of a recreational site is measured by the travel costs of

people (which is then interpreted as the willingness to pay)

Source: Saskatchewan Dutch Elm Disease Association

Constructed market Contingent Valuation method• people are asked how much they are willing to pay for an

environmental good

• quite a used method (hundreds of scientific articles)

• The fundamental approach to direct benefit assessment is to construct a hypothetical situation and ask the respondent to quantify WTP for a specified environmental good:

– The Village of Lake Wobegon is considering the acquisition 100 acres of undeveloped land to expand the village park. How much would you [a resident] be WTP in a property tax surcharge to maintain 100 acres of open space?

Discounting

What is Discounting?The valuation in present day $ of the future C’s and B’s arising from a project.

Consequences of Discounting

Progressively reduces the PV of future C’s and B’s . This reduction is intensified as we extend our appraisal further into the future.

Justifications for Discounting1.Positive Time Preference - People prefer benefits now rather than later.

2.The Productivity of Capital - Money makes more money. $1 invested now will be worth $1 plus the rate of interest by the end of the year. This means we value $1 now more than $1 received at the end of the year.

Problems with B/C analysis:

• Uncertainty with the physical C’s & B’s

• Accuracy and acceptability of monetary valuations

• Distribution of C’s & B’s among the population

• Discounting the future

• Limited value scope

Discounting in General

In what other ways do we discount?

AF System

BENEFITS COSTS

INTERNAL EXTERNAL INTERNAL EXTERNAL

TimberGrants/Subsidies

Commercial Recreation

Sporting Venison

Supply security Employment/Rural Support Reducing

Agricultural Surpluses Import Savings

Land Labour Capital Expertise

Grants/Subsidies Alternative output

(Opportunity Costs)

Recreation/educationAmenity

Wildlife habitatEcology valueBiodiversitySoil StabilityHydrological

regulationstorage

Carbon sinks/macroclimate regulationMicroclimate regulation

Berries/Game etcFuel

Shelter

Market priced items in an internal account

Recreation lossAmenity lossHabitat loss

Ecological lossBiodiversity lossSoil degradation

Hydrological:Water trapsAcidification

External impacts priced by reference to markets

Non market external impacts. Pricing via monetary evaluation methods

where feasibleKey to boxes:

Value Analysis radiata pine plantations on a farm

raising milk cows

Non-market Valuation & Policy

Methodology:

• Survey Based, Contingent Valuation – WTP, WTA

• NOAA Rules

Source: Government of Alaska

Gulf of Alaska, 1989

Exxon Valdez

Total Economic Value (TEV) of Prince William Sound, Alaska, 1992

Source: Bateman (1999)

1999

Value of lost oil:About $8 million

$2.8 Billion in lost passive values(Carson et al., 1992)

$19MMLost tourism, 1989

(McDowell Grp, 1990)

$360MMAwarded

To Fish ind. & NA

Art by Jerome Lawrence, 2006

All photos from http://www.montpellier.inra.fr/safe/english/agroforestry.php#

The Look of Agroforestry: A Temperate View

Wild cherry trees and Rapeseed (Brassica napus), in spring (Hérault, France)

Lavender and walnut trees at the beginning of summer (Drôme, France)

Young walnut trees in wheat (Hérault, France)

Market gardening under peach orchards (Pyrénées-Orientales, France)

Fruit trees in lavender (Alpes de haute-Provence)

Olive and vine system (Hérault, France)

Dual purpose walnut trees intercropped with maize (Isère, France)

Truffle oaks in viticulture plots (Côtes du Rhône, France)

Potato cultivation in a poplar plot which has been planted at a density used in forestry

Triticale in a plot of four year old walnut trees

The harvest of a plot of five year old hybrid walnut trees planted at 13 x 4 m (Hérault, France)

Walnut trees and intercropped sunflower (Drôme, France)

Alfalfa intercrops between lines of walnut fruit trees (Drôme, France)

Just so you know…

WTP can =

….

CV and other methods can get a bit hairy…

“I believe there is only one conflict, and that is between short-term and long-term thinking. In the long term, the economy and the environment are the same thing. If it is unenvironmental it is uneconomic. That is a rule of nature.”

– Mollie Beattie (1947 – 1996), former director of US Fish & Wildlife Service