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Session 2: Valuation methods 1 ©TEEB.

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1 Session 2: Valuation methods 1 ©TEEB

2 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 Explain that there are three broad categories of valuation approaches. Outline the types of methods used in each and where they can be applied. Direct market valuation uses data on values that we can observe in actual markets. There are three main types of market valuation data: Market prices – we observe these for goods and services that are traded in markets Cost-based approaches – where we equate the value of an ecosystem service to either the cost of provision for the service, the costs of alternatives to that service (e.g. man-made infrastructure in place of a regulating service), or the cost of damage where a service is not provided or fails (e.g. flood damage costs). Production functions – using data on the quantity or quality of ecosystem services together with other goods or services to produce a final good with a related price or cost. Market valuation approaches are typically used for provisioning goods (prices), regulating services (costs, production functions) and potentially supporting services (production functions) In revealed preference methods we infer the value of ecosystem services from observing people’s behavior. There are two common methods: Travel cost method – used for valuing recreational sites and assumes that the value that someone places on a site or activity is related to the amount of time and money they spend travelling to undertake the activity at a particular site. Hedonic pricing – uses the assumption that the quality or quantity of ecosystem services in an area are reflected in local property prices, along with a range of other property and neighborhood attributes Travel cost are used for particular types of cultural services, hedonic pricing can be used for a variety of services including regulating, cultural (amenity) and commonly applied to negative impacts such as noise (road, aircraft), odours, dust etc. Stated preference approaches use hypothetical markets to elicit willingness to pay or willingness to accept compensation for a change in provision of an ecosystem service. There are a number of variations of this approach including contingent valuation, choice modeling group valuation. The hypothetical nature of these methods mean that they are very versatile in terms of the types of ecosystem services they can value and whether their provision is existing or proposed. ©TEEB

3 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 Explain that market prices are most commonly used for provisioning services An example is changes in fish stocks or forestry stocks – we can refer to market prices for fish or timber (as well as non-timber forest products) Market is not ‘well-functioning’ if say, for instance, there are distortions caused by government intervention – say taxes or subsidies ©TEEB

4 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 Explain that costs based approaches estimate the costs incurred in recreating a regulating ecosystem service artificially Avoided cost method: costs incurred in the absence of the ecosystem service Replacement cost method: costs incurred by replacing ecosystem services with artificial technologies Mitigation or restoration cost method: cost of mitigating effects of a loss of ecosystem services, or the cost of achieving their restoration Give examples including: Avoided cost – cost of storm surge damage that would occur without coastal mangroves Replacement cost –cost of a waste water treatment plant in place of wetlands Mitigation cost - use of hard engineering for flood defence where flood attenuation services are lost due to land use change (e.g. deforestation) ©TEEB

5 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 Explain that Production function (PF) approaches estimate the contribution of an ecosystem service a final commodity. Improvement in resource base or environmental quality, i.e. enhanced ecosystem services, lowers costs and prices or increases quantity of goods Two-step procedure: Determine physical effects of change in resource or ecosystem service Impact of change is valued in terms of corresponding change in marketed product Requires knowledge of relationships between ecosystems services and valued end points Applicable to regulating and supporting services ©TEEB

6 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 Explain that although direct market approaches are based on observable prices and costs, there are important limitations to consider. Lack of markets for ecosystem services or related goods and services Markets are distorted: Subsidies Lack of competition Replacement cost approach can overstate value as value is based on cost of alternative not the value of the benefit provided PF approaches have specific problems: Data and knowledge of cause-effect relationships is often lacking Interconnectedness and interdependence (e.g. joint production, synergy, mutual exclusivity) of ecosystem services increases likelihood of double counting ©TEEB

7 Revealed preference RP methods are based on observations of individual choices related to an ecosystem service Appropriate for direct and indirect use goods Stages Determine existence of surrogate market for ecosystem service Select appropriate RP method Collect market data to estimate demand function Infer value of change in quantity/quality from demand function Aggregate values Discount values where appropriate Explain that whilst a direct market might not exist for the ecosystem service we are interested in valuing, there may be a surrogate market where we can infer value indirectly. In other words, the value is ‘revealed’ by observing behaviour in other markets. For instance there is no direct market for a beach view, but there may be a premium in the housing market (or price of a hotel room) for this view. Outline the stages of the RP approach

8 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 The first RP method we will consider is the travel cost method. Explain that the value people place on an environmental good such as a recreational site can be inferred from the amount of time and money people spend getting to it. Explain that the travel cost method uses surveys to estimate visitor numbers and is used to estimate the direct use value of cultural ecosystem services

9 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 Explain that when using the travel cost method there are some important practical issues to consider. Outline the following issues: Functional form – this is to do with the econometric analysis – not covered here but the choice can make a big difference to outcomes Multi-purpose – how do we split the total leisure time/travel costs is the key question here. Holidaymakers versus residents – important when considering international tourism What element of cost to consider

10 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 Introduce the first TCM example – estimates of domestic and foreign visitors’ values for recreational visits to the Hon Mum Islands in Vietnam. The islands are the site of Vietnam’s first pilot MPA, but the proposal to expand the nearby port of Nha Trang would lead to increased shipping movements and consequent impacts on water quality and marine ecosystems. Source: Google Maps

11 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 Travel cost method: example
TCM value estimates (1US$ = 14,500VND) Consumers surplus Price paid Recreational value All Visitors (US$m) Per Visitor (US$) Domestic visitors 1.49 8.96 2.46 15.16 3.95 22.74 Foreign visitors 1.64 17.22 31 129.53 13.95 146.76 Total 3.13 14.77 17.90 Explain that the table presents the estimated zonal TCM results for both domestic and foreign visitors, both aggregated across all visitors and per visitor. Note that values for all visitors are in million s of US$ and per visitor are in US$. Consumers’ surplus represents the benefit of visits over and above the price paid, i.e. the TCM estimates the demand for visits and this is total WTP rather than price (illustrate consumers’ surplus on white board or flip chart if needed). Total recreational value is the sum of consumers’ surplus and price paid. Explain that these values are the benefit of recreational visits throughout the wider economy and include costs of transport paid to domestic and overseas operators amongst other elements that will not directly accrue to the local community. Compare these values with the estimated US$3.1m annual revenue generated by the proposed port expansion = less than 20% of the recreation value. Note that this excludes other benefits from ecosytem services such as fisheries

13 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… Explain that another common type of revealed preference method is hedonic pricing in which the value of environmental amenity is one of several characteristics of property that effects its value. Outline the important attributes that affect property values. Provide examples of the types of environmental good values using HP: Air quality Visual amenity Noise (from roads, aircraft, industry) Odours

14 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 Explain that thee are a number of practical issues when using HP and outline these issues: Only considers values of those in the property market Large amounts of data required Important variables may be missing or unavailable Property markets are segmented Variables may be correlated (e.g. both noise and dust from quarries) Complex functional forms – needs expertise

15 Hedonic Pricing: example
UK Defra study on effects of proximity to landfill sites on house prices Introduce the example from the United Kingdom commissioned by the Department for Environment, Food and Rural Affairs (Defra). This looked at the impact of proximity to landfill waste sites on property values.

16 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) Explain that there are multiple issues of disamenity from landfill sites, but that the study did not separate these. Outline the variables used in the analysis

17 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 Describe the data used in the study and the summary of the model

18 Hedonic Pricing: example
Highlight some of the findings from the models. This table presents the % change in value for properties at different distances from landfill sites across different UK regions. In most, but not all, regions there is a clear distance decay effect – namely the negative effect on property prices is higher the closer the property is to the landfill site. The effect on prices is zero or insignificant at distances over 2 miles from landfill sites. Emphasise that only the figures in bold are statistically significant.

19 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 Outline these further results from the example that put the percentage impacts into context.

20 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 Explain that the outputs from the valuation exercise can be used to inform a number of policy questions.

21 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 Outline the limitations of the revealed preference approach – applies to both HP and TC methods.

22 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 Introduce the next approach to valuation – stated preferences. Explain that this covers a range of methods in which a hypothetical market is developed in order to elicit either willingness to pay or willingness to accept compensation for a given change in ecosystem service provision. Explain that this approach can value both use and non-use values, although emphasise that might not be separable, and can importantly consider future changes and policy.

23 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 Outline the three broad methods that will be considered.

24 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 Outline the key features of the contingent valuation method

25 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 Explain that there has been some controversy over the WTP and WTA measures – theory suggest these should be equal but observation shows otherwise. Outline the reasons why WTP and WTA differ and emphasise that this has implications for how we ask valuation questions.

26 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). Start with focus group sessions and consultations with stakeholders to define the good to be valued. Decide the nature of the market, i.e., determine the good being traded, the status quo, and the improvement or deterioration level of the good that will be valued. Determine the quantity and quality of information provided over the traded “good‟, who will pay for it, and who will benefit from it. The property rights implied in the valuation scenario will determine whether a WTP or WTA question is more appropriate. If the scenario involves a loss of ecosystem services then WTA compensation for that loss would be appropriate. This implies a ‘right’ to the current level of ecosystem service provision. However, given that WTP is generally lower than WTA and to ensure a conservative value estimate it may be preferable to phrase the scenario in terms of WTP to avoid that loss. Scenarios involving an improvement in ecosystem service provision are less problematic in terms property right allocation and a WTP scenario is appropriate. The payment scenario and payment vehicle refer to how the change in ecosystem services will be delivered and how it will be paid for. Given the hypothetical nature of the market these should seem credible and realistic. The elicitation method refers to how survey respondents are asked to state their values. The simplest way is an open-ended approach where respondents are asked to state a value. This can be problematic as respondents are unfamiliar with either the good being valued or the concept of transacting for ecosystem services. Alternatively, respondents might be shown a payment card with a range of possible values, again due to unfamiliarity with this type of exercise. Bidding games start by suggesting a value to respondents and asking if they are WTP more or less than that figure, higher or lower value amounts are then suggested iteratively until maximum WTP is identified. Responses may be subject to anchoring where respondents consider the original bid value to be the ‘correct’ value. Payment ladders list a range of values, respondents are asked to ‘climb’ the ladder from the bottom until they reach their maximum WTP. Uncertainty might also be incorporated by asking to respondents to indicate which values from the bottom of the ladder they ‘definitely would pay’ and those higher values from the top they ‘definitely would not pay’, this might leave a range of uncertainty. The preferred elicitation approach is the use of a dichotomous choice or referendum format. Respondents are offered one value (from a pre-determined distribution) and asked a yes or no question of whether they would be willing to pay it. The variation of initial bids across a large sample avoids the anchoring problem of a bidding game. The initial bid might then be followed up with higher (if yes) or lower (if no) amount. Because this approach samples WTP for different potential WTP amounts (to identify a WTP or bid curve) rather than arriving at a firm WTP value for each respondent it requires much larger sample sizes and therefore is more expensive.

27 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 Explain the there are a number of way to implement a CVM survey, the choice of these will depend on the nature of the good being valued and the time and resources available for the study. Outline the following considerations Interviews can either by face-to-face, by mail, by telephone or via the internet. Group valuations are also increasingly popular. Face-to-face interviews are generally the most preferred as they offer the opportunity to present a lot of complex information to be presented (either as show cards or on-screen), however they are expensive and time consuming to undertake. Group valuation might be considered a variation of a face-to-face interview that might be more cost effective as it allows the simultaneous sampling of small or large groups. Group valuation can also be useful for constructing values and where shared values might be important; although the process involves a group individual values for each participant would still be sought. Mail and internet surveys are generally less expensive but may taken time to collect a sufficiently large sample. There may also be concerns over who is actually completing the survey. Telephone surveys can either use material read out to respondents over the telephone or refer to previous mailed information packs. As with mail and internet surveys these do not have the potential to interact with respondents, for example to clarify questions about information being provided or the valuation scenario. The cost of telephone surveys would lie between mail and internet and face-to-face interviews. The choice of interviewer is also important. Researchers involved in the study have the advantage of being knowledgeable about what is being valued, but this might also be a disadvantage as they may introduce bias into the study. Professional interviewers from market research companies can be dispassionate and unbiased about the study and better able to work with respondents. There are a number of alternative sampling strategies. Convenience samples might be appropriate and sufficient where surveys are being undertaken of relevant users, for example at a specific recreational site. Where the wider population is the ‘market’ for the good then the sample should be representative according to potentially important socio-economic or demographic variable (e.g. gender, age, income). To ensure representativeness stratification might also be desirable, for example rural and urban populations, visitors and residents to a site.

28 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 Outline the different approaches to eliciting values and welfare changes. Discuss the following considerations with these elicitation approaches Calculating the welfare change for open-ended, payment cards or ladders and bidding game formats is relatively straightforward. This could simply be the mean WTP or WTA value across the sampled respondents. If there are extremely high WTP or WTA values then a trimmed mean might be estimated. Outlying values are identified and removed from the analysis. However this is contentious as there are no firm criteria for identifying outlying bids. Criteria could be statistically based, for example out side a specified number of standard deviations of the mean, or based on judgement about reasonable ability to pay. However it is possible that some individuals will have a genuinely very high WTP. Outlying bids can also be accommodated by also reporting median bids which are less responsive to extreme values. Outlying bids might also reflect strategic behaviour by some respondents. Here, if there is a belief that the WTP amount stated will not be collected (either fully or in part) and that the provision of the good depends on the sufficient WTP being stated there is an incentive to overstated actual WTP to ensure provision. Conversely, if there is belief the stated WTP will be collected, but that provision of the good is not dependent on WTP there is an incentive to free ride and unstated actual WTP. Both of these biases will affect mean WTP, but truncation of high WTP will only correct for strategic behaviour, the presence of free-riding amongst genuinely low WTP amounts is less obvious. The estimation of WTP or WTA when using dichotomous choice is less straightforward and involves calculating the expected value of WTP or WTA given the probabilities that each offered bid level will accepted. From this a bid curve is estimated and the mean WTP(A) is that value with a 50% probability of acceptance. The nature of this format does mean that strategic behaviour and free-riding are less problematic.

29 Stated preference: CVM process IV
Technical validation Estimating a bid function Testing the validity and reliability of the estimates produced Explain that the validity of CVM value estimates should be tested to ensure confidence in the results. Discuss how validity can be tested using data collected in the survey or in comparison to other value estimates. The validity of CVM responses can be explored by estimating a bid function in which the influence of respondent socio-economics, demographics and attitudes are modelled against their WTP(A) response. It would be expected that income and education level (a proxy for income) would be positively related to WTP as would membership of environment groups or positive environmental attitudes. This is known as construct validity and refers to how well the characteristics of the sample explain the estimated values. Convergent validity is tested by comparing the estimated values to either those for similar goods using either the same or other methods; or by comparing to other values obtained from the same population. Note that differing values are often observed for the same good across different methods or CVM elicitation formats, with no clear indication as to which is ‘correct’.

30 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. Explain that the value estimate should be aggregated over the relevant population – this could either by the number of visitors to a particular site, the local or national population, or the number of households locally or nationally. Explain that if the valuation was for an on-going rather than one-off payment it might also be appropriate to discount future values to obtain the present value. However, note that is not clear how future values will change with increasing household or national income, or changes in other ecosystem services. Therefore reporting values using a range of discount rates as part of a sensitivity analysis might be appropriate.

31 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 Explain that the Exxon Valdez study was one the most prominent applications of the methodology as the study was used to estimate compensation payments following the oil spill. Because of the potential cost to Exxon from the outcome of the study a great deal of effort was put into discrediting the method. In turn this led to a great deal of methodological refinement including the NOAA Blue Ribband panel chaired by Kenneth Arrow that set guidelines for robust CVM studies.

32 Contingent valuation method: example
Bann (1999) Survey of 300 households’ WTP for mangrove protection in Benut, Malaysia (243 useable responses) Introduce the example which was a CVM study of WTP to a biodiversity fund to protect the Benut mangrove area in Malaysia. Source: Google Maps

33 Contingent valuation method: example
56% of respondents stated a positive WTP, of those who didn’t 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 wouldn’t Explain that there are three types of response to a CVM questions – a positive statement of WTP or zero WTP which can be interpreted in one of two ways. Zero WTP may either be a protest bid or a genuine zero value. Follow-up questions are need to distinguish these. Protests bids are against aspects of the hypothetical market such as objections to the payment vehicle, but do not mean that the respondent does not value the environmental good – these responses are excluded from further analysis. Genuine zero bids arise where responds either cannot afford to pay or do place any value on the environmental good – these responses are included in the analysis. Outline the WTP results from the payment ladder approach – the ticked values can be interpreted as the lower-bound of WTP and the crosses the upper-bound. Median values are presented because the distribution of WTP was skewed (a small number of very high values). These values have been converted from monthly WTP in Malaysian Ringgits. Note that skewed distributions are common problem in CVM. Aggregated over the relevant local population of 12,650 gives an annual value mangrove protection of approximately US$40,000 Mean US$18 US$61 Median US$10 US$30

34 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 Introduce choice modelling as alternative stated preference method and outline its main characteristics: Also referred to as choice experiments (CE) Type of conjoint analysis (inc. contingent ranking and rating), more consistent with economic theory and consumer experience Respondents within the survey are given a choice between several options, each consisting of various attributes, one of which is either a price or subsidy. ‘Price’ is included as a policy attribute Respondents are then asked to consider all the options by balancing (trading off) the various attributes, and make a “choice” of a policy package Can combine qualitative and quantitative attributes

35 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 Explain that there are a number of practical considerations when using CM: Requires specialist statistical design (and software) and sampling resources Complex tasks may lead to use of simplistic choice heuristics by respondents, i.e. fixation on one or small subset of attributes. Need to debrief respondents Potentially complex analytical task Inclusion of socio-economic and attitudinal variables in models not straightforward. Need to interact with one or more of the choices (e.g. status quo) or one or more attributes

36 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 Introduce the CM example and outline the characteristics of the study

37 Choice Modelling: example
Attributes 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 Non- snorkelers Snorkelers Outline the attributes used in the study and how these were applied to both snorkelers and non-snorkelers – capturing different beach users groups

38 Choice Modelling: example
Explain that attributes and levels can be presented in a number of ways, here to help respondents visualise these levels of improvements in water clarity the study used pictorial descriptions for the attributes. No Policy High Policy Low Policy

39 Choice Modelling: example
Summarise the example choice card for non- snorkelers containing 6 attributes exclusive of the fee. Explain that respondents were given a choice of three alternatives including the no choice option. So they were asked whether they would be willing to pay to visit a beach with certain characteristics. 198 (snorkellers) and 86 (non-snorkellers) = 284 respondents

40 Choice Modelling: example
Individual-specific WTP estimates (TT$ ~ 0.16US$) for snorkelers Class one (61%) Class two (39%) Up to 60 fishes 35 5 Up to 45 % coral cover 50 10 Vertical visibility of up to 10 m 40 Marine Protected Area which allows fishing 33 7 Marine Protected Area which prohibits fishing 34 Plastics of up to 5 pieces 15 Low chance of ear infection 22 25 Low level of development Explain that the CM approach estimates values for individual attribute level relative to a reference level (usually a no change or no policy status quo level) Explain that these results are for a model that consider two different segments of snorkelers – class 1 has stronger preferences for ‘in water’ attributes such as number of fish, coral cover, visibility and conservation level; whereas class two is more concerned with signs of human impacts including litter, health risks and development. Emphasise that recognising the potential for different values from different groups is important for ensuring good policy design and stakeholder acceptance. 1TT$ ~ 0.16US$

41 Stated preference: 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 Explain that stated preference techniques such as CVM and CM can be applied in group settings as well as individually. Explain that this can help convey complex information to respondents and allows a deeper understanding to the issue and why it might be valued to be developed.

42 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? Outline the following limitations to stated preference methods: 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 – WTP often does not vary over different quantities of the same good, also issues with availability of substitutes. Are the different values comparable to a common metric – Are different CV approached and CM measuring a consistent good? Goods are complex – is there a need for pre-valuation workshops so that respondents can better understand their preferences?

43 Comparisons between approaches: Market-based
Advantages Disadvantages 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 Outline the advantages and disadvantages of each of the market-based valuation approaches. Emphasise that each method has its good and bad points meaning that there is no one best method and the choice is more importantly driven by the context of the valuation.

44 Comparisons between approach - cost-based
Advantages Disadvantages 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 applied Data or resource limitations may rule out first-best valuation methods Outline the advantages and disadvantages of the cost-based approaches. Note that these approaches are typically used for regulating services which are otherwise difficult to value.

45 Comparisons between approach - Revealed and stated preference
Advantages Disadvantages Hedonic pricing Reflects private WTP Based on observed behaviour Data intensive Requires defined surrogate market Travel cost WTP for recreational sites 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 Outline the advantages and disadvantages of revealed and stated preference methods. Emphasise that these approaches are of particular use when markets or costs do not exist, for example of cultural services. Emphasise that stated preference approaches are the only way to incorporate non-use values and are also widely used for valuing ex ante policy changes.

46 What do the methods capture? TEV and valuation methods
Use values Non-use values Direct Indirect Option Existence Bequest Market Production Function Confidence? Value? Revealed Preference Note that this slide indicates which valuation approaches are appropriate for which elements of TEV Emphasise that as we move from market to stated preference methods we may become less confident in our estimated values, but that we are able to capture a larger degree of potential values. Similarly as we move from direct use to non-use values we may also be less confident of our estimated values, but we also capture a greater degree of potential value. Stated Preference Value? Confidence?

47 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 Summarise the session by noting that the valuation approaches differ in terms of data needs, categories of TEV captured and our confidence in values. But those values with lower data needs and higher confidence such as market prices only value a sub-set of ecosystem services.

48 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? Introduce the group exercise. Ask the participants (in the same groups as before) to reconsider the valuation gaps they had identified and suggest methods to fill these. Ask if any gaps remain. Record the outcomes on the white board or flipcharts ©

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