(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