pricing nature cost benefit analysis and environmental policy pdf

Pricing Nature Cost Benefit Analysis And Environmental Policy Pdf

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Lisa A. Wainger , Robert J. Johnston , Kenneth J.

Pricing Nature Cost Benefit Analysis And Environmental Policy Book By Nick Hanley

Lisa A. Wainger , Robert J. Johnston , Kenneth J. Bagstad , Clyde F. Casey , and Tibor Vegh. This section provides basic guidance for using and conducting economic valuation, including criteria for judging whether valuation is appropriate for supporting decisions.

It provides an introduction to the economic techniques used to measure changes in social welfare and describes which methods may be most appropriate for use in valuing particular ecosystem services.

Rather than providing comprehensive valuation instructions,it directs readers to additional resources. More generally, it establishes that the valuation of ecosystem services is grounded in a long history of non-market valuation and discusses how ecosystem services valuation can be conducted within established economic theory and techniques. Economic valuation of ecosystem services can provide decision makers with evidence of the social benefits provided by, and tradeoffs among,regulatory alternatives and other ecosystem management or policy actions.

Valuation implies a systematic quantification of benefits and costs realized by society in commensurable typically monetary units, using methods grounded in economic theory. A basis in economic welfare theory is one of the primary distinguishing features of economic valuation. This underlying theory provides a formal structure necessary to link estimated monetary values with changes in net well-being or social welfare.

Without this link, there is no guarantee that a monetary measure will have any correspondence to social welfare.

Economic value measures can also be aggregated over affected populations, typically by multiplying the number of affected parties by the magnitude of benefit or harm to each. When monetary measures of ecosystem services have been estimated using methods that share this theoretical grounding, they are internally consistent and directly comparable , regardless of the source or cause of the benefit or cost.

This internal consistency and comparability, together with more than five decades of methodological development, are some of the main reasons that monetary values are the most commonly used quantitative measures of ecosystem services value within policy analysis.

The FRMES Guidebook describes a broad suite of approaches for assessing ecosystem services benefits using monetary values and non-monetary benefit indicators. This section focuses on valuation and, reflecting U. Office of Management and Budget OMB guidance for benefits analysis, defines valuation as economic valuation or monetization. When choosing among the benefit assessment techniques presented in this guidebook, consider that economic valuation is rarely the sole input to decision making.

In most cases, a variety of other considerations will enter into the decision process that either cannot or should not be monetized. When valuation cannot provide an adequate range of quantitative information required for policy or program analysis, policymakers can supplement or supplant economic valuation with other metrics or approaches.

For example, non-monetary benefit metrics or benefit-relevant indicators can be a cost-effective method for comparing alternatives that are difficult to distinguish with monetization.

Agencies can review the Ecosystem Services Assessment Framework Overview to determine which benefit assessment approach best fits their decision-making needs. Choosing a benefit assessment technique monetary valuation, multi-criteria decision analysis, or quantification of benefit-relevant indicators requires evaluating the type and accuracy of information needed in a given policy context.

For example, legal proceedings e. Some techniques might characterize the effects and tradeoffs of greatest concern better than others. In addition, valuation and non-monetary benefit assessment techniques vary in terms of data and time requirements, so the availability of funding and other resources will influence decisions.

Economic theory imposes specific guidelines on how empirical data can be used to quantify and combine values to prevent the misuse and misinterpretation of data and results. After the metrics have been generated, economists tailor the economic analysis to the ecosystem, social setting, and decision context to ensure that values are estimated from the biophysical changes and that metrics are valid, representative, and useful.

The intent of this section is to provide basic guidance for economic valuation, not to provide comprehensive instructions for all valuation methods. A great deal of research has explained and demonstrated methods and best practices for broadly valuing ecosystem services and non-market resources. This section presents concepts and considerations applicable to choosing an approach to benefits assessment and describes valuation approaches that are most relevant to ecosystem service analysis.

Economic values or benefits measure gains in social welfare or well-being. The economic value of a good or service to an individual or group reflects the increase in well-being that the good or service generates. In the context of ecosystem services, economic values measure gains in social welfare resulting from changes in outputs of natural ecosystems. Because it is impossible to directly observe changes in social welfare, economists measure values by observing the tradeoffs that individuals are or would be willing to make.

That is, they measure economic value as the amount of one good or service that a person would be willing to exchange for a specific quantity of another good or service, rather than go without the service.

When monetary units are used for quantifying a change in welfare, the result is a measure of monetary value. Monetary units are a convenient unit of measure for assessing value, but other metrics can, under certain conditions, be used to represent value.

This definition also implies that economic values are based on subjective assessments of individuals regarding their own welfare and the types of tradeoffs that would enhance that welfare. Although the vast majority of economists accept this approach, some competing schools of economic thought propose that individuals may not have or be able to generate preferences that reflect their well-being for all types of goods and services. For example, public spending to enhance wetlands might be used to value a bundle of ecosystem services that the wetland generates—a practice known as public pricing—under the assumption that the government has the information necessary to act in the public interest or the assumption that regulations and government policies reflect public preferences because the public votes for the legislators making the regulations.

However, because this is a minority view, valuation methods that rely on such judgments may not be acceptable to all types of decision makers, nor are they approved for use by most government agencies to measure economic benefits. Drawing from the above definition of value, WTP measures the amount of money or some other commodity that an individual or group would be willing to give up to obtain a specified quantity of an ecosystem service, compared to a given baseline quantity.

Value may also be quantified in terms of willingness to accept WTA , defined as the minimum amount that a person or group would be willing to be compensated in order to give up a specified quantity of an ecosystem service that they already have or would otherwise get in the future under business as usual.

Given these definitions, ecosystem services values are only meaningful for quantified changes in ecosystem services compared to a baseline, and not when summed over entire ecosystems. Valuation must account for many variables that can influence the benefits provided by ecosystems, but an issue of particular relevance to ecosystem services is that the value of a change in a system depends on the initial state of the ecosystem or resource.

System state i. For example, a pollution reduction that allows game fish to re-establish in a stream can generate a more substantial increase in recreational fishing opportunities compared to a nutrient reduction in a moderately degraded stream that already contains abundant game fish. In addition, an angler may be willing to pay more per fish to increase her catch from 0 to 1 fish than from 49 to 50 fish, reflecting diminishing marginal returns.

Thus, meaningful economic valuation requires information on the magnitude of the change in ecosystem services from current and future baseline conditions and the context-specific value of that change to beneficiaries. The size of the change alone does not dictate value. Rather, the relative scarcity of the good or service demand relative to supply determines the value of a change in that good or service.

The supply of an ecosystem service is determined by natural ecological processes often subject to external human influences or stressors. These distinct ways to measure economic value are appropriate to use in different circumstances because they make different assumptions about who has the right to a good or service.

For example, one of the most common metrics used to quantify economic benefits or value for individuals is consumer surplus. Consumer surplus is interpreted as the difference between what an individual or group of individuals would be willing to pay for a given level of a good or service and what is actually paid, summed over all units of the good or service that are consumed or used.

The change in consumer surplus across all affected individuals may be aggregated to estimate the value of a change in an ecosystem good or service. A parallel measure for producers is producer surplus , which is conceptually similar to economic profit.

Other metrics that are frequently used as proxies for welfare changes, such as prices, avoided costs, or replacement costs have weaker or no ties to social welfare within economic theory. These metrics can still prove useful,because they are relatively easy to measure and can sometimes provide information similar to economic benefit metrics.

That person will have underestimated willingness to pay to protect the trees for maple syrup production, not to mention all the other values people might have for protecting the trees. On the other hand, the market value of property saved due to a given flood control investment might be considered acceptable for comparing alternative investments in flood control, as long as decision makers are aware of the pros and cons of this measure.

Furthermore, they should be aware of the assumptions that are embedded in use of this measure to reflect social welfare, namely that the value of the property is equivalent to lost welfare.

Decision makers should be aware that price and cost data are considered proxies, often for only one service, rather than direct measures of social welfare. As such, they do not provide reasonable or informative metrics of value in all circumstances. An economist trained in valuation can help determine whether and how these proxies may be useful for approximating economic values.

Decision makers often seek the most comprehensive assessment possible in order to promote understanding of how ecosystems provide everything from basic life support to financial and social well-being.

Although thoroughness is desirable, complete measurement of all direct and indirect ecosystem services benefits due to a change is rarely possible. Moreover, attempting to be comprehensive increases the risk that benefits will be double counted.

The difficulty of putting a dollar value on all ecosystem services is well understood among practitioners and is the reason that OMB guidance suggests that assessments should monetize what is possible to monetize, quantify what cannot be monetized, and describe what can be neither monetized nor quantified for regulatory rule making.

In an effort to be comprehensive about assessing ecosystem service changes, practitioners have attempted to quantify the total economic value of entire landscapes, biomes, or other very large systems. As noted above, economic value measures are only meaningful for changes in ecosystem services from a known baseline.

Careful selection of ecosystem services for valuation and calculation of values only for changes in ecosystem services rather than entire landscapes can avoid some of these common pitfalls. Sometimes those seeking to calculate a total value for all or some services provided by a large ecosystem have confused the resulting generally invalid estimates with valid measures of total economic value TEV.

This confusion reflects a misunderstanding of the concept. Economists use the concept of TEV to reflect the fact that changes in ecosystem services can simultaneously affect many different types of values, including both use and non-use also known as passive use values. Overlooking one or more of these distinct types of value can lead to large errors and sub-optimal decisions even if many ecosystem services have been valued.

The concept of TEV does not imply that one is measuring the total value of an entire landscape or ecosystem. Like all economic values, TEV is only meaningful when well-defined changes from a known baseline are considered. A typology of ecosystem services values can be used to define TEV Figure 1. Use values are those that result from direct use e.

Non-use values , in contrast, are values that do not require observable use or consumption of the service.

But recent research suggests that option value is more appropriately considered an implicit component of use services, rather than a theoretically distinct and separable component of use value. Note: Adapted from R. Turner, S. Georgiou, and B. So, for example, the TEV of a marginal change in waterfowl abundance at a wetland site might include use values realized by waterfowl hunters and birders, along with non-use values realized by those who simply value the existence of these birds.

In concept, these and other values are simply summed to calculate the total value generated by the marginal change. Summing must avoid any overlaps in these value estimates that can lead to double counting. Many economic frameworks are available to evaluate policy choices with and without monetization of ecosystem services values. CBA is the most comprehensive and is specifically designed to quantify total net effects on human welfare. Monetized ecosystem services values are a key component of a CBA, for decisions that affect ecosystems.

Although CBA provides more explicit guidance than CEA about whether an action is socially desirable, it also requires that the outcomes expected to generate the major benefits and the costs be monetized.

CEA uses non-monetary metrics of beneficial outcomes as proxies for social welfare e. CEA is used to identify the options that achieve desired outcomes at the lowest cost, but it does not quantify benefits in monetary terms. Which approach—CBA or CEA—is most appropriate will depend on the type of decision being made as well as the state of the ecological and social science.

Pricing Nature Cost Benefit Analysis And Environmental Policy Book By Nick Hanley

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Pricing Nature: Cost-Benefit Analysis and Environmental Policy

These include revealed preference methods hedonic pricing travel cost and defensive expenditure and stated preference methods contingent valuation and discrete choice experiments. Cost benefit analysis and environmental policy making edward b barbier university of wyoming nick hanley university of stirling disciplines economics publication date fall publisher edward elgar isbn 1 4. Barbier edward elgar cheltenham uk. Pricing nature cost benefit analysis and environmental policy book by nick hanley.

In memory of David W. Barbier All rights reserved.

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Starting in mids with recommendations on cost—benefit tests for water-related projects, there are now requirements of CBA for the implementation of projects in a large number of fields related to infrastructure, health, and environment. Unlike the United States, most countries in Europe apply precautionary principles for regulation even if there is no convincing scientific evidence on the environmental hazards. These two decision rules can give rise to quite different outcomes with respect to environmental regulations, such as the different approaches to genetically modified organisms where benefits are emphasised in the United States, but risks in Europe. One important hesitation against the use of CBA in Most users should sign in with their email address. If you originally registered with a username please use that to sign in.

Hanley, N. Edward Elgar: Cheltenham.

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Pricing Nature: Cost-Benefit Analysis and Environmental Policy

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