INSTITUTE OF FOOD AND RESOURCE ECONOMICS THE ROYAL VETERINARY AND AGRICULTURAL UNIVERSITY Rolighedsv

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INSTITUTE OF FOOD AND RESOURCE ECONOMICSTHE
ROYAL VETERINARY AND AGRICULTURAL
UNIVERSITYRolighedsvej 25 Phone
45 35 28 22 801958 Frederiksberg C
Email
adu_at_kvl.dkDenmark

• BENEFITS AND HOW TO EVALUATE THEM
• Alex Dubgaard
• Presentation at the conference
  Cost-effectiveness what is it and how to define
  it? Held by Aalborg Municipality and Copenhagen
  Energy, 9 June 2006

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SIMPLE COST-EFFICIENCY ANALYSIS

• Simple cost-efficiency analysis investigates
• How specified objective e.g. drinking water
  standards can be realized at lowest possible
  costs?
• Extending supply system to unpolluted aquifers?
• Reduced fertilizer use?
• Afforestation?
• Wetland restoration?

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LIMITATIONS OFSIMPLE COST-EFFICIENCY ANALYSIS

• Simple CEA is relevant if
• if only cost minimization is required or
• environmental criteria are commensurate in
  physical terms e.g. green house gases.
• Simple CEA may fail to identify best social
  alternative if
• one or more options yield multiple benefits
• not commensurate in biological or physical terms
  e.g. recreational benefits, biodiversity, etc.

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EXTENDED COST-EFFICIENCY ANALYSIS

• Extended CEA incorporates side benefits
• If drinking water standards can be realized by
  converting farm land to nature
• Outdoor recreation and biodiversity benefits
  should be included in CEA.
• However, environmental indicators are specified
  in incommensurate physical units
• Economic valuation required to provide
  commensurate (monetary) measures of environmental
  values.

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ENVIRONMENTAL VALUE CATEGORIES

• Direct use value
• For example use of recreational areas, angling
  etc.
• Indirect use value
• E.g. filtration and decomposition of polluting
  substances
• CO2-storage of forests, etc.
• Option value
• From opportunity to use environmental benefits,
  e.g. recreational areas.
• Non-use values
• Existence value

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Price and Cost Measures of Value

• Effect on production approach
• Measured as net profit/(land) rent foregone.
• Purification costs
• E.g. benefits from groundwater protection
  measured as treatments cost for polluted
  groundwater to be used as drinking water.
• Replacement cost
• Assesses the value of a natural resource by how
  much it costs to replace or restore it after it
  has been damaged.
• No guarantee that purification or replacement
  costs equal citizens willingness to pay.

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VALUATION METHODS

• Based on measurement of individual preferences in
  terms of willingness to pay.
• Revealed Preference (based on market behaviour)
• Travel Cost models
• Hedonic pricing
• Averting expenditure/avoided costs
• Only use values can be estimated.
• Stated Preferences (based on interviews)
• Contingent Valuation Method (CVM)
• Choice modelling discrete choice, contingent
  ranking etc.

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TRAVEL COST METHOD

• Used extensively to value outdoor recreation
  benefits
• TCM uses cost of travelling to a recreation site
  as a means of estimating recreational benefits
• Willingness to accept travel costs means that
  recreational site has a value
• Correlation between visitors' costs of travelling
  to a site and visit frequency
• utilized as a basis for estimating willingness to
  pay for access.

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HEDONIC PRICING METHODS

• Environmental characteristics affect property
  prices
• proximity to recreational areas, air quality,
  etc.
• House Price Method utilize correlation between
  property values and quality of amenities
• to estimate individuals willingness to pay for
  environmental amenities e.g. proximity to
  forest.

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AVERTING BEHAVIOUR

• Averting Behaviour approach
• Used to value disamenities affecting individuals
  health or wellbeing
• Purchase of bottled water/installation of water
  filtration are substitutes goods for a cleaner
  aquatic environment.
• Correlation between
• Varying drinking water quality levels and
  expenditures on substitutes goods
• serves as a basis for estimation of willingness
  to pay for water quality improvements.

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EXPRESSED PREFERENCE TECHNIQUESCONTINGENT
VALUATION METHOD

• The Contingent Valuation Method (CVM)
• Stipulates a scenario for the preservation/improve
  ment of an environmental service
• Respondents are asked to state their willingness
  to pay (e.g. through taxes) for the benefit.
• Several willingness to pay elicitation methods
• Open-ended format asks respondents to state their
  maximum willingness to pay amount
• Dichotomous choice asks if the respondent would
  pay some specified amount (take it or leave
  it).
• Scientific controversies
• About the reliability of the willingness to pay
  answers.

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EXPRESSED PREFERENCE TECHNIQUESChoice Modelling
Methods

• Stated preferences techniques focusing on the
  attributes of (environmental) goods
• Goods are defined by their attributes and the
  levels of the attributes
• Inclusion of price attribute facilitates
  estimation of willingness to pay.
• Choice Experiment
• Two or more alternatives presented
• The most preferred alternative chosen

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Choice Experiment

• Visual disamenities of off-shore wind farms

Distance 8 km. Turbines 144. Windfarms 5. Cost
pr household 10 .
Distance 50 km. Turbines 100. Windfarms 7.
Cost pr household 350 .
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EXPRESSED PREFERENCE TECHNIQUESPROBLEMS

• Willingness to Pay (WTP) vs. Compensation
  Demanded (WTA)
• WTP and WTA should be close when expenditure on
  good is a small percentage of income
• But, CVM experiments show that WTP is often much
  smaller than WTA.
• Embedding
• Refers to sequencing and scope effects
• Sequencing WTP for good x depends on its order
  in a sequence of valuations (y, x, z) vs. (y, z,
  x) or (x, y, z)
• Nesting/Part-Whole Bias WTP does not always vary
  with scope of good WTP to preserve one forest
  WTP to preserve all forests.

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BENEFIT TRANSFER

• Given the high cost of well-done valuation
  studies it is
• Often necessary/desirable to transfer WTP
  estimates from
• a study site
• to a policy site.

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Approaches to benefits transfer

• Transfer of
• Mean values/unit transfer
• Willingness to pay per household
• Adjusted mean values
• WTP per household adjusted for e.g. income and
  other differences
• Benefit functions (bid curves)
• Incl. different variables and parameters
  affecting willingness to pay
• Meta analysis.

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Benefit evaluation studies in DK Regarding Water

• Surface water quality
• Valuation of groundwater protection versus water
  treatment in Denmark by Choice experiments and
  Contingent Valuation, NERI Technical Report no.
  543. (www.dmu.dk) Hasler et al, 2005
• Economic Value of Recreational Fisheries in the
  Nordic Countries. http//www.evri.ca/english/scre
  ener/screener.cfm?processnextfa4af0.19184798
  Toivonen et al, 2000
• Groundwater quality
• Valuation of groundwater protection versus water
  treatment in Denmark by Choice experiments and
  Contingent Valuation, NERI Technical Report no.
  543. (www.dmu.dk) Hasler et al, 2005
• Wetlands/costal zone
• Dubgaard, A., M.F. Kallesøe, J. Ladenburg M.L.
  Petersen Cost-benefit analysis of the Skjern
  River restoration in Denmark, in R. Brouwer D.
  Pearce (Eds.) Edward Elgar Publishing,
  Cheltenham, UK, 2005. pp 124-150
• Valuation of nature protection and wetland
  restoration in Great Aamose, Westzealand.
  Lundhede et al/Hasler et al, 2005.
• Ladenburg, J., Dubgaard, A., Martinsen, L. and
  Tranberg, J. (2005) Economic Valuation of the
  Visual Externalities of Off-Shore Wind Farms,
  Report from the Food and Resource Economic
  Institute, Report No. 178, Copenhagen.