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TEEB Training Session 2: Valuation methods 1 ©TEEB.

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1 TEEB Training Session 2: Valuation methods 1 ©TEEB

2 TEEB Training Approaches to Valuing Ecosystem Services Direct market valuation approaches: use data from actual markets Revealed preference approaches: economic agents reveal their preferences through their choices Stated preferences approaches: simulated markets where values are sought for changes in provision or policy ©TEEB

3 TEEB Training Direct market valuation: Market-based Market price based approaches –Most often used to obtain values for provisioning services –Preferences and marginal cost of production are reflected in market price –In well functioning markets, price provides accurate information on value ©TEEB

4 TEEB Training Direct market valuation: Cost-based Cost based approaches –Costs incurred in recreating an ecosystem service artificially Avoided cost method Replacement cost method Mitigation or restoration cost Appropriate for regulating services ©TEEB

5 TEEB Training Direct market valuation: Production function Production function approaches –Estimates contribution of an ecosystem service to a final commodity –Improvement in resource base or environmental quality, i.e. enhanced ecosystem services, lowers costs and prices or increases quantity of goods –Requires knowledge of relationships between ecosystems services and valued end points Applicable to regulating and supporting services ©TEEB

6 TEEB Training Direct market valuation: limitations Lack of markets for ecosystem services Markets are distorted Replacement cost approach can overstate values Production function approaches have specific problems: –Lack of data/knowledge of cause-effect relationships –Interactions across ecosystem services increases likelihood of double counting ©TEEB

7 TEEB Training Revealed preference RP methods are based on observations of individual choices related to an ecosystem service Appropriate for direct and indirect use goods Stages 1.Determine existence of surrogate market for ecosystem service 2.Select appropriate RP method 3.Collect market data to estimate demand function 4.Infer value of change in quantity/quality from demand function 5.Aggregate values 6.Discount values where appropriate

8 TEEB Training Revealed preference: Travel Cost Method Travel cost method (TCM) –The value of an environmental good is reflected in the time and money people spend getting to it e.g. forests, mountains, fishing sites –Based on actual behaviour, mostly used for recreation studies –Visitor surveys are used to determine distance travelled to site, values are estimated from cost per mile or per hour spent travelling –Travel costs are used to estimate the number of visits made –Only direct use values are estimated Appropriate for cultural services

9 TEEB Training Revealed preference: Travel Cost Method cont… TCM practical issues –Functional form –Multipurpose trips: Meanderers may visit several sites during a trip Purposeful visitors visit only one site –Holidaymakers and residents: Holidaymakers may have high overall costs but low site visit costs Residents have lower travel costs, but may in fact value the site highly Some form of weighting required to account for these –What costs to include? Total cost of travel, marginal cost of visit, value to time

10 TEEB Training Travel cost method: example Nam and Son (1991) –Recreational value of the Hon Mun Islands Vietnam –Marine Protected Area established in 2001 with US$2m funding over 4 years –Proposal to expand port at Nha Trang City with impacts on water quality and marine ecosystems Source: Google Maps

11 TEEB Training Travel cost method: example Both domestic and foreign visitors to Hon Mun were surveyed and zonal TCMs estimated –10 domestic zones, 3 international zones –In 2000 there were 397,000 domestic and 118,700 foreign visitors

12 TEEB Training Travel cost method: example TCM value estimates (1US$ = 14,500VND) Consumers surplusPrice paidRecreational value All Visitors (US$m) Per Visitor (US$) All Visitors (US$m) Per Visitor (US$) All Visitors (US$m) Per Visitor (US$) Domestic visitors 1.498.962.4615.163.9522.74 Foreign visitors 1.6417.2231129.5313.95146.76 Total3.13 14.77 17.90

13 TEEB Training Revealed preference: Hedonic pricing Hedonic pricing (HP) –The value of a good is a function of its characteristics, e.g. house prices (or rents) are determined by a number of attributes: Structural: number of rooms, garden size, garage size, central heating, double glazing… Socio-economic: quality of schools, unemployment rate, local taxes… Local amenities: access to services, transport links, environmental quality…

14 TEEB Training Revealed preference: Hedonic pricing HP practical issues –Values of those not in property market –Large amounts of data are required to determine the values of individual attributes, and needs active market –Omitted variable bias: important explanatory variables may be missing from data –Housing markets tend to be segmented, i.e. several hedonic models may have to be estimated –Variables may be correlated, e.g. houses near quarries suffer from both noise and dust –Hedonic models often have very complex functional forms

15 TEEB Training Hedonic Pricing: example UK Defra study on effects of proximity to landfill sites on house prices gislation/landfill/documents/landfill_disamenity.pdf gislation/landfill/documents/landfill_disamenity.pdf

16 TEEB Training Hedonic Pricing: example Types of disamenity from landfill: –noise, dust, litter, odour, vermin, visual intrusion, perception of risk Housing variables used: –bedrooms –bathrooms –type of house (8 classes) –car parking space, single garage, double garage –partial central heating, full central heating –floor area –age (5 classes)

17 TEEB Training Hedonic Pricing: example Used a GIS database of 592,000 mortgage transactions –contained data on house values, characteristics, location –1990 to 2000 period –11,300 landfill sites - 6,100 operational Models estimated separately for counties (sub-regions) to account for differing property markets Hedonic model captured 80% of the variation in house prices, variables had right signs

18 TEEB Training Hedonic Pricing: example

19 TEEB Training Hedonic Pricing: example Average reduction in house prices of £5,500 within 0.25 miles of landfill and £1,600 between 0.25 and 0.5 miles Average total UK disamenity = £2,483m Between £334,350 and £478,990 per landfill site Between £1.52 and £2.18 per tonne of waste

20 TEEB Training Hedonic Pricing: example How are these results used? –Inform landfill tax levels - initially £15/tonne for active waste –Inform planning decisions –Feed into CBA on landfill siting decisions mitigation actions financial costs of alternative sites –Potential for compensation? Some evidence of reduction in dis-amenity effects over time

21 TEEB Training Revealed preference: limitations Market imperfections and policy failures Large, good quality data sets required Expensive and time consuming Omits non-use values Sensitive to assumptions made on relationship between ecosystem service and surrogate market

22 TEEB Training Stated preference SP approaches use simulated markets to elicit willingness to pay (WTP) or accept (WTA) values for changes in ecosystem service provision Appropriate for both use and non-use values –May be difficult to segregate these value motives from WTP Survey based methods in which respondents are presented with a hypothetical market describing the change in service provision

23 TEEB Training Stated preference Summary on methods covered Contingent valuation method One policy-on scenario compared with Business As Usual (BAU) Choice Experiments Attributes are compared, e.g. visibility in the sea Some baseline BAU level for each attribute and this is compared with varying levels (with policy-on) Group valuation Less commonly applied – links valuation with deliberative methods

24 TEEB Training Stated preference: Contingent valuation Contingent valuation method (CVM) A hypothetical market is described in which respondents either buy (WTP) or sell (WTA) a specified level of an environmental good or service The values which are elicited are contingent on the hypothetical market with which respondents are presented

25 TEEB Training Stated preference: Contingent valuation cont… Large differences between WTP and WTA for the same good, neoclassical economic theory suggests they should be near equal –Loss aversion and implied property rights - ownership makes a commodity more valuable –Absence of substitutes –Irreversibility –Income and budget constraints

26 TEEB Training Stated preference: CVM process I Survey design –Start with focus groups and consultations with stakeholders –Decide the nature of the market –Determine the quantity and quality of information provided for the good –Set allocation of property rights WTP or WTA –Determine credible scenario and payment vehicle (tax, donation, price). –Choose elicitation method (e.g. dichotomous choice vs. open- ended elicitation method).

27 TEEB Training Stated preference: CVM process II Survey implementation and sampling –Interview implementation: face-to-face, mail, telephone, internet, groups –Interviewers: private companies, researchers –Sampling: convenience sample, representative and stratified sample

28 TEEB Training Stated preference: CVM process III Calculate measures of welfare change –Open-ended – simple mean or trimmed mean (with outliers removed ) –Payment cards/ladders –Bidding games –Dichotomous choice – estimate expected value of WTP or WTA

29 TEEB Training Stated preference: CVM process IV Technical validation –Estimating a bid function –Testing the validity and reliability of the estimates produced

30 TEEB Training Stated preference: CVM process V Aggregation and discounting –Calculating total WTP from mean/median WTP over relevant population – for example by multiplying the sample mean WTP of visitors to a site by the total number of visitors per annum. –Discount calculated values as appropriate.

31 TEEB Training Stated preference: CVM example 1989 Exxon Valdez spilt 11 million gallons of oil in Prince William Sound, Alaska. CVM study was carried out to estimate passive use value (existence, bequest) loss to US citizens. WTP values sought for policies to prevent similar spills in future. WTA would have been correct measure. Estimated total loss was $2.81bn

32 TEEB Training Contingent valuation method: example Bann (1999) –Survey of 300 households WTP for mangrove protection in Benut, Malaysia (243 useable responses) Source: Google Maps

33 TEEB Training Contingent valuation method: example 56% of respondents stated a positive WTP, of those who didnt 49% gave protest responses, meaning that Payment ladder and dichotomous choice elicitation methods were used –The payment ladder asked respondents to tick values they would pay and cross values they wouldnt MeanUS$18US$61 MedianUS$10US$30

34 TEEB Training Stated preference: Choice modelling Choice modelling (CM) –Also referred to as choice experiments (CE) –Type of conjoint analysis –Survey respondents make choices across environmental goods with varying bundles of attributes –Trade-offs between attributes reveals their values –Can combine qualitative and quantitative attributes

35 TEEB Training Stated preference: Choice modelling CM issues: –Requires specialist statistical design (and software) and sampling resources –Choice tasks can be complex –Potentially complex analytical task –Inclusion of socio-economic and attitudinal variables is not straightforward

36 TEEB Training Choice Modelling: example Valuing quality changes in Caribbean coastal waters for heterogeneous beach visitors (Beharry-Borg and Scarpa, 2010) Most locals do not snorkel or dive. In order to ensure that the valuation captured both locals and non locals two groups were Identified snorkelers and non snorkelers. Most valuation studies in the Caribbean have focussed on obtaining WTP values for attributes associated with snorkelling and scuba diving There were 9 attributes in the snorkeler subsample and 6 in the non snorkeler subsample plus a cost attribute Cost was described in terms of a contribution cost to an NGO

37 TEEB Training Choice Modelling: example 1. Number of boats near the coastline 2. Presence of a marine protected area 3. Level of coastline development 4. Average bathing water quality 5. Level of vertical visibility 6. Number of plastics per 30m 7. Contribution fee 8. Number of snorkelers per group 9. Level of coral cover 10. Number of fish seen while snorkelling Attributes Snorkelers Non- snorkelers

38 TEEB Training Choice Modelling: example No PolicyHigh Policy Low Policy

39 TEEB Training 198 (snorkellers) and 86 (non-snorkellers) = 284 respondents Choice Modelling: example

40 TEEB Training Choice Modelling: example Individual-specific WTP estimates (TT$ ~ 0.16US$) for snorkelers Class one (61%)Class two (39%) Up to 60 fishes355 Up to 45 % coral cover5010 Vertical visibility of up to 10 m4010 Marine Protected Area which allows fishing337 Marine Protected Area which prohibits fishing3410 Plastics of up to 5 pieces1550 Low chance of ear infection2225 Low level of development1540 1TT$ ~ 0.16US$

41 TEEB Training Stated preference: Group valuation Group valuation –Combination of stated preference techniques with deliberative techniques –Offer a deeper exploration of environmental information, values and preference formation –Trade-off of smaller groups versus survey approaches versus more precise values

42 TEEB Training Stated Preference: Limitations Sometimes the only way to capture non-use values Hypothetical nature of the markets: do the decisions correctly reflect real-life behaviour? Divergence between WTP and WTA estimates (theoretically equal) Insensitivity to scope and scale Are the different values comparable to a common metric? Goods are complex – is there a need for pre-valuation workshops so that respondents can better understand their preferences?

43 TEEB Training Comparisons between approaches: Market- based AdvantagesDisadvantages Market prices Reflect private WTP Construct financial accounts Easy to obtain Market imperfections and policy failures distort prices Seasonal variations Currency variations Shadow prices Reflect true economic value or opportunity cost to society Complex to derive Require substantial data Considered artificial Production function Links ecosystem functions to market values Requires modelling of dose response relationships Complex for multi-use systems Potential double counting

44 TEEB Training Comparisons between approach - cost- based AdvantagesDisadvantages Mitigation/ restoration costs Useful when valuing particular ecosystem functions Diminishing returns and difficulty in restoring functions Replacement costs Estimates indirect benefits when ecological data not available for estimating damage functions Net benefits of replacement may exceed original function May overstate WTP Avoided damage cost Precautionary principle appliedData or resource limitations may rule out first-best valuation methods

45 TEEB Training Comparisons between approach - Revealed and stated preference AdvantagesDisadvantages Hedonic pricing Reflects private WTP Based on observed behaviour Data intensive Requires defined surrogate market Travel cost WTP for recreational sites Based on observed behaviour Data intensive Restrictive assumptions about behaviour Sensitive to statistical methods Contingent valuation Can measure non-use value and give estimate of TEV Sensitive to biases in survey design and implementation Choice modelling Simultaneously elicits values for a range of goods and services Complex statistical design and analysis Potential burden on respondents – choice heuristics

46 TEEB Training What do the methods capture? TEV and valuation methods Use valuesNon-use values DirectIndirectBequestExistenceOption Market Production Function Revealed Preference Stated Preference Confidence? Value?

47 TEEB Training Session Summary Different methods available but variability in terms of: –Data needs –Categories of TEV valued –Confidence in value outcomes Those that rely on market prices (or surrogates/ proxies) tend to only value a sub-set of ecosystem services

48 TEEB Training Group exercise Returning to the gaps on value information you identified earlier, can you suggest which valuation methods might be appropriate to address the gaps? Do any gaps remain? ©

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