Magazine 2012
Different Aspects and Methods of
Environmental Valuation
Dr. Gaurang Yajnik
Shree Sahajanand Vanijya Mahaviyalaya, Ahmedabad
Thinking systematically about benefits, costs and tradeoffs can improve your ability to tackle real world
environmental problems even when it is not possible to estimate benefits and costs explicitly.
-
Keohane N.O. and S. M. Olmstead
There are innumerable species existing on this earth, each with a well-defined and constantly evolving relation
with earth and environment. Among all these species human beings or humankind is also a species which has
a typical or peculiar relationship with nature, earth and environment. It is only humankind whose relation with
environment or nature has constantly been evolving over a period of time especially in the last few centuries.
Humankind as a species has been constantly evolving because of its possession and expansion of knowledge
and in turn has also resulted in the drastic change in its relationship with environment. Moreover, it is also
observed that modern-day environmental problems are due to the human interference with environment. This
interference is mostly of economic nature and it is well-established a fact that the environment and economy
are inter-related.
Every development process uses natural as well as man-made resources and as a result it also creates some or
the other damage to the environment and this process of economic development in the last century has
created serious problems of sustainability of development. Sustainable development can be defined as
development through the use of resources for the present generation keeping the same provisions for the future
generations.
To prevent or reduce this damage at a sustainable level, proper and strict policy measures are necessary. And
to formulate appropriate policies it is very necessary to measure the economic value of all the natural resources
going to be used or abused. Hence, there is the need to have proper environmental valuation which is the
process of assigning economic values to the environmental assets available in abundance or scarcity. According
to Katar Singh and Anil Shisodiya, b By environmental valuation, we mean estimating the economic values of
natural resources and environmental assets, goods and services.b (Singh, 125)
An attempt has been made in this paper to explain not only the importance of environmental valuation but also
to discuss various aspects of environmental valuation and different approaches or methods of environmental
valuation.
Environmental Valuation:
Before starting a discussion regarding environmental valuation one has to understand the basic economic
functions of environment and important characteristics of environmental goods.
The three major economic functions of environment are as follows:
b "
Environment acts a supplier to economic activities (resource provision)
b "
Environment acts as an assimilator and recycler of waste generated during the process of production
and consumption by humankind.
b "
Environment also acts as direct source of utility.
All the above mentioned functions are not performed through market mechanism because there cannot be
direct positive prices or exchange values of all environmental goods and services. Following are certain features
of environmental goods which are responsible for their non-market value:
1.
Irreversibility
Irreversibility is attached to environmental goods as decisions regarding their use are generally irreversible
because we cannot regenerate environment in accordance to our will and wish. Moreover, we are not in a
position to even change the regeneration or assimilative capacities of nature according to our whims and
fancies. Also, we donb t exactly know natureb s regenerative and assimilative capacities. (Some attempts have
been made in this direction to measure the pace of use of natural resources by humankind and natureb s
regenerative or sinking capacities like the measure of footprint by WWF.)
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2.
Uncertainties
Humankind is struggling to know as much as possible regarding nature, species and its ecological balance
mechanism but cannot accumulate all the information regarding natureb s ecological balance mechanism, its
inter/intra-relationship of all the species, flora and fauna. This creates uncertainties. We are not sure what
exactly we are likely to lose in future if we use up or misuse particular environmental goods.
3.
Uniqueness
All environmental goods and amenities are unique in themselves. They are not replicable like manmade products.
Thatb s why humankind cannot bring back extinct species or natural resources. What humankind can do (if at all
possible) is to implement protective or preventive measures by making laws, policies, mobilizing public awareness,
etc.
4.
Interdependence
Interdependence on each other is another important characteristic of environmental goods and services. It is
very difficult for humankind to establish casual relations with environmental goods. In fact, it is interdependence
which is responsible for the uncertainty and uniqueness and irreversibility of environmental goods and services.
Moreover, because of these particular features of environmental goods it is very difficult to arrive at a precise
economic valuation which is very important for policy formation. As Katar Singh observes:
Environmental valuation and accounting can be useful for several purposes such as . . . determining the trade-
offs between economic development and quality of environment and extent of financial liability of firms and
households who degrade natural resources and pollute the environment. Estimation of the economic values of
natural resources and environmental amenities and services is necessary as there are no markets for most of
them and there are externalities involved in their use. (Singh, 125)
It would be useful at this juncture to understand some of the following concepts related to the values of benefits
from environmental assets:
User Value:
User value is derived from actual use of the environment, e.g. benefits of breathing free (non-polluted) air, etc.
User Value is also known as Instrumental Value or Operational Value or Functional Value of the environmental
goods or services or amenities.
Non-user Value:
The value of an environmental asset estimated for future use is known as Non-user Value. Non-user value is
further divided into (i) Option Value and (ii) Existence Value.
Option Value:
When we value environment and keep the option of its use open for the future then it is known as Option Value.
Option Value is further divided into Bequest Value and Vicarious Value.
Bequest Value:
When we value the environment keeping its use open for the future generation, it is known as Option Value.
However, when the future generation comprises oneb s own direct descendents then the relevant Option Value is
called the Bequest value.
Vicarious Value:
When we value the environment keeping its use open for the future generation in general, the Option Value is
known as Vicarious Value.
Existence Value:
The Existence Value is the non-user benefit. This intrinsic value arises as a result of the uniqueness of the
environmental asset. Moreover, the Existence Value arises from the attempts of individuals inspired by any
motives (e.g. ethical, etc.) It is the value which people are willing to pay for the prevention of any environmental
amenity from destruction or extinction which is also independent of any present use of such environmental
amenities or resources. According to Katar Singh, b Existence Value arises from preventing the extinction of a
species or preventing a complete destruction of a natural resource or an environmental amenity.b (Singh, 141).
Following is the chart showing the specifications of the total Economic Value of the Environment:
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The above discussion indicates that Total Economic Value of an environmental asset is the summation of user as
well as non-user values. There are many methods of measuring the user/non-user values of environment. The
discussion regarding some of the methods is as follows:
Total Economic
Value
User Value
Non User Value
Existence Value
Option Value
Vicarious Value
Beqest Value
b "
Market Valuation Method
Market Valuation Method is used to value environmental goods, amenities and services which are marketed
wherein the actual use value or imputed market prices or stimulated market prices of environmental goods are
considered. Moreover, this method is also used for the valuation of the natural resource depletion. According to
this method actual environmental expenses are accounted as production cost if incurred as intermediate
consumption goods and services or as depreciation of capital goods used in environmental protection and as
final demand categories, they are outlays by households for final consumption, by enterprises for capital formation,
and by the government for both. In all these cases, they are valued at the market price at which these goods
and services are acquired.
But when in some cases the estimates regarding future returns and costs of natural resource exploitation and the
choice of the discount rate is difficult to obtain, then the Net Price Method and User Cost Allowance Method are
also used. These methods are the simplification of the principle of Present Value Calculations.
The Net Price Method does not consider future losses of net returns from resource depletion. The net price is
defined b as the actual market price of the raw materials minus its marginal exploitation cost including a b normalb
rate of return of the invested produced capital.b (Singh 130)
The User Cost Allowance Method tries to b convert a time bound stream of (net) revenues from the sales of
exhaustible natural resources into a permanent income stream by investing a part of the revenues, namely b User
Cost Allowanceb over the lifetime of the resource; only the remaining amount of the revenues should be considered
b true incomeb . . . Both these valuation methods have been applied in the Integrated Environmental and Economics
Accounting (SEEA) case studies to assess a range of cost estimated. (Singh 131)
I. Contingent Valuation Method
The Contingent Valuation Method is the most popular and widely used method of social sciences research
methods. According to this method the respondents are presented with a set of questions to which they have to
respond in either b yesb or b nob or select from the range provided. The questions may also be of the referendum
type or may be direct questions. So far as environmental valuation under the Contingent Valuation Method is
concerned, respondents are provided with questions in the form of referendum or the ranges which they are
willing to pay for the maintenance of a particular environmental amenity or service.
The Contingent Valuation Method is a type of survey method and as said in the foregoing it is widely used as
one of the most popular methods in social sciences and is extensively used in developed as well as developing
countries. Despite this, the Contingent Valuation Method suffers from some important limitations like:-
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b "
b "
b "
Lack of validity of the insights derived from the respondentb s responses for a hypothetical situation.
The problem of accuracy and reliability of the estimates.
The inadequate level of awareness of the respondents for overall environmental degradation particularly
related to the questionnaire.
b "
Vulnerability of the Contingent Valuation Method to biases like strategic, design, information, hypothetical
and operational.
b "
The problem of estimating or calculating the aggregate value from the individual responses.
Maintenance Cost Valuation Method
II.
The use of market valuation is more significant in the cases of those environmental goods, amenities, services
or assets where economic values are available. But all environmental assets or amenities or services do not
have market transactions. As a result market valuation is not possible in such cases and therefore the Maintenance
Cost Valuation Method is useful. In other words, Maintenance Cost Valuation Method is used for those
environmental functions, amenities or services whose values are not expressed by their market prices. [Following
requests made in Agenda 21 of the 1992 United Nations conference on Environment and development (Earth
Summit) in Rio de Janeiro, the United Nations Statistics Division (UNSD) published in 1993, a handbook of
National Accounting entitled Integrated Environmental and Economic Accounting (SEEA)] (Singh)
Katar Singh notes in this context:
In order to obtain a more comprehensive picture of environmental costs, beyond natural resource depletion, a
maintenance cost valuation is introduced in the SEEA as an alternative or addition to market valuation Maintenance
costs are defined as the costs which one would have had to incur during the accounting period in order to
avoid current and future environmental deterioration from the impacts caused during the accounting period.
(Singh, 132)
Here it must be remembered that maintenance cost is that cost which any individual, industry or government
pays for the maintenance of environmental quality. But it also depends on the method or procedure selected
for avoidance, prevention or restoration of environmental quality and the level of technology used for such
chosen method.
III.
Travel Cost Method
The Travel Cost Method is one of the indirect methods of environment valuation. This method assumes a
relationship between the environmental amenities and visitorsb willingness to pay for those amenities. Mostly
this method is used to find out indirectly the eco-tourism values of particular environmental recreation sites like
National Parks, hill stations, etc. Rabindra Bhattacharya notes:
This method involves using travel cost as a proxy for the value of visiting outdoor recreational sites. A statistical
relationship between observed visits and the cost of visiting is derived and used as a surrogate demand curve.
The Travel Cost Method assumes (weak) complementarity between the environmental asset and consumption
expenditure. (Bhattacharya, 139)
This method is widely used in India (The case study of Keoladeo National Park). But under this method the
calculating travel cost becomes more difficult in cases where the site is one of the many tourist attractions of the
particular region or in cases where the travelling to the particular place or site is done for multiple purposes.
The following table shows some examples of empirical case studies done in India for measuring economic
values of environmental amenities (Singh 142):
Intangible Benefits
Annual Value
Location
Methodology Used
Travel Cost Method
Recreation/Ecotourism
Rs. 427.04 per Indian
Keoladeo National
visitor and Rs. 432.04 per Park, Bharatpur
foreign visito
(Rs. 16,197/ha)
Recreation/Ecotourism
Rs. 516 per Indian visitor
and Rs. 495 per foreign
visitor
Keoladeo National
Park, Bharatpur
Contingent Valuation
Method
(Rs. 20,944/ha)
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Recreation/Ecotourism
and other benefits
Rs. 90 per household per Boriwali National
year Park, Mumbai
Rs. 23,300/ha)
Contingent Valuation
Method
(
Ecotourism
Rs. 9.5/local
Kerala) visitor
Rs. 676/ha
Periyar Tiger Reserve Contingent Valuation
Method and
(
Travel Cost Method
Conclusion:
It is very evident that the estimating economic value of environmental amenities is a very complex and difficult.
Moreover measurement of intangible benefits and costs becomes still more difficult as finding reliable universally
acceptable method for them is also a challenge. This paper has attempted to acquaint the reader with the
different methods of valuing environment to provide more precise guidelines or suggestions for proper policy
decisions aimed at sustainable development but the point to be kept in mind is it is always better not to
damage the environment than to measure the damage. It is the sole duty of humankind not to pollute or
damage nature for the sake of the present as well as future generations. It is well said, b Prevention is better than
cure.b
References:
Bhattacharya, Rabindra N, ed. Environmental Economics: An Indian Perspective; New Delhi: OUP, 2002
Keohane,Nathaniel O and Sheila M. Olmstead, Markets and the Environment: Washington: Islandpress, 2007.
Singh, Katar and Anil Shisodiya, Environmental Economics: Theory and Application: New Delhi, Sage
Publications, 2010.
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